J USTIFICATION OF THESIS
Despite the negative effects of COVID-19, Vietnam is one of the few countries that recorded positive growth in foreign direct investment in early 2021 1
In the first quarter of 2021, Vietnam's total investment capital reached approximately US$ 10.13 billion, marking an 18.5% increase compared to the same period in the previous year, according to the General Statistics Office (GSO) This growth highlights the critical importance of foreign investment, particularly foreign direct investment (FDI), in driving Vietnam's economic development during this period.
To enhance the international trade and foreign investment in Vietnam between Vietnam and the EU, in July 2015, Vietnam had successfully negotiated the
The EU-Vietnam Free Trade Agreement (EVFTA) aims to enhance economic cooperation between the two regions In 2017, the EU and Vietnam decided to separate the original agreement into the EVFTA and the EU-Vietnam Investment Protection Agreement (EVIPA) to address investment protection and dispute settlement While the EVFTA officially came into effect in August 2020, the EVIPA has yet to be ratified by EU member states Nevertheless, the EVIPA is anticipated to attract European investment and modern technology to Vietnam while safeguarding investors and their investments in both regions.
The COVID-19 pandemic led to a significant decline in foreign direct investment (FDI), with global FDI flows plummeting by as much as 40% in 2020 Projections indicate a further decrease of 5 to 10% in 2021, highlighting the ongoing impact of the crisis on international investment For more information, refer to the UNCTAD "World Investment Report."
The UNCTAD's "World Investment Report 2020" explores the impact of the pandemic on international production, highlighting shifts in global investment patterns and strategies The report, published by the United Nations in New York, provides essential insights into how businesses can adapt to the evolving economic landscape post-COVID-19 For further details, the full report is accessible at the UNCTAD website.
In the first quarter of 2021, Vietnam's General Statistics Office (GSO) reported significant statistics on Foreign Indirect Investment, highlighting key trends and insights from January 1 to March 20, 2021 For detailed data, visit the GSO's official website.
The regulatory framework for foreign investments in modern international investment agreements (IIAs) aims to balance two key objectives: attracting foreign investments to foster economic and social development in host countries, and ensuring that this development is sustainable and does not compromise essential values such as consumer health, environmental protection, and workers' rights Modern IIAs, particularly the European Union's Investment Protection Agreement (EVIPA), emphasize sustainable development alongside investment protection However, the challenge arises when investment protections potentially conflict with environmental and social policies, as seen in dispute practices where environmental regulations are contested under investment principles Therefore, host states must carefully navigate their commitments to foreign investment protection while simultaneously pursuing sustainable development and environmental safeguards.
Vietnam presents a promising investment landscape for foreign investors; however, a significant portion of foreign direct investment (FDI) is directed towards heavy industries, which pose a considerable risk of environmental pollution As of 2013, only 5% of FDI enterprises in Vietnam utilized high technology, while 80% employed medium technology and 14% relied on low technology This distribution highlights the pressing need for a shift towards more sustainable and advanced technological practices in the country's investment sectors.
3 Hanoi Law University (2017), Textbook on International Investment Law, Youth Publishing House, Preface
Foreign investors in Vietnam are increasingly contradicting expectations by failing to adhere to environmental laws, leading to significant environmental damage during their investment activities This alarming trend highlights the urgent need for stricter compliance measures to protect Vietnam's natural resources and ensure sustainable development.
The government has implemented various measures aimed at protecting the environment, which impact foreign investors; however, these measures may lead to lawsuits for violating the fair and equitable treatment (FET) obligation or causing unlawful indirect expropriation under the BIT or FTA to which Vietnam is a party Therefore, it is crucial to examine the interplay between FET, indirect expropriation regulations, and the environmental protection rights of the host state as outlined in the EVIPA This research is essential for developing effective precautionary measures to prevent future disputes between EU investors and the Vietnamese government.
For these reasons, the author decided to study the topic: “Environmental
Protection Right toward Fair and Equitable Treatment and Indirect Expropriation regulations in EVIPA and Recommendations for Vietnam” as the bachelor’s thesis
An increasing number of foreign direct investment (FDI) enterprises are contributing to pollution in Vietnam, highlighting a growing environmental concern This trend poses significant challenges for sustainable development in the country As more FDI companies establish operations, it is crucial to address the environmental impact and implement stricter regulations to mitigate pollution levels.
L ITERATURE REVIEW
Materials in Vietnamese
In the article "The Relationship Between 'Fair and Equitable' and Environmental Purpose in CPTPP – Recommendations for Vietnam" by Nguyen Thi Lan Huong, published in the Legal Science Journal, Volume 06, 2019, the author explores the Fair and Equitable Treatment (FET) standard in international investment law and its interpretation in investment disputes The study highlights the connection between the FET standard and environmental objectives within the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), offering recommendations for Vietnam However, the author primarily addresses FET regulations without delving into indirect expropriation, which is prevalent in investment disputes Additionally, while the article discusses environmental protection and provides suggestions for Vietnam under CPTPP, it does not consider the provisions of the EU-Vietnam Investment Protection Agreement (EVIPA), which is relevant to the thesis.
Bài viết "Áp dụng quy định trường hợp ngoại lệ về môi trường trong pháp luật đầu tư quốc tế và một số so sánh với thực tế Việt Nam" phân tích cách thức áp dụng các quy định ngoại lệ liên quan đến môi trường trong bối cảnh pháp luật đầu tư quốc tế, đồng thời so sánh với thực tiễn tại Việt Nam Nội dung chính tập trung vào việc đánh giá hiệu quả và tính khả thi của những quy định này, từ đó đưa ra các khuyến nghị nhằm cải thiện chính sách đầu tư bền vững tại Việt Nam.
In the article "Applying Environmental Exception in International Investment Law: Comparisons with the Reality in Vietnam" by Tran Thang Long, published in Nghiên cứu lập pháp Journal, Volume 04, 2019, the author provides a comprehensive overview of the concept of international investment exceptions The piece explores the practical application of these exceptions within the context of international law, highlighting their significance in balancing investment protection with environmental considerations Furthermore, it draws comparisons to the current situation in Vietnam, illustrating how these principles are implemented in the country’s legal framework.
The article examines five investment disputes but primarily emphasizes the environmental exceptions in international investment law, drawing comparisons to the general exceptions outlined in GATT and GATS However, it lacks a comprehensive analysis of the environmental exceptions present in new-generation International Investment Agreements (IIAs).
Materials in foreign languages
This thesis explores key concepts in international investment law, including FET standards, indirect expropriation, and environmental protection rights, drawing on various foreign materials that enhance understanding of these critical areas.
“Standards of Investment Protection” of August Reinisch or “Principles of
International Investment Law”, of Rudolf Dolzer and Christoph Schreuer and many
Despite the availability of documents from UNCTAD and OECD, research on the relationship between these issues and the Vietnamese context, particularly regarding the provisions of the EVIPA, remains scarce The novelty of the EVIPA, coupled with a lack of concrete case studies, has resulted in limited detailed analysis, often only scratching the surface of the topic.
In conclusion, there are no materials in Vietnamese or foreign languages mentioning the environmental protection right in EVIPA in detail.
P URPOSE OF THESIS
This thesis examines the interplay between the right to Fair and Equitable Treatment (FET) standards and lawful indirect expropriation of investors, alongside the host state's right to environmental protection within International Investment Agreements (IIAs), focusing specifically on the EU-Vietnam Investment Protection Agreement (EVIPA) The author will evaluate the effectiveness of environmental protection rights in EVIPA and offer recommendations for Vietnam on how to effectively implement EVIPA provisions to uphold environmental protection.
R ESEARCH D ELIMITATION
Due to time and resource constraints, the author has focused this thesis on the theoretical and practical aspects of the Fair and Equitable Treatment (FET) standard, indirect expropriation, and environmental protection rights within international investment law, specifically concerning the EVIPA and various international investment agreements The theoretical framework includes key definitions and perspectives that align with the author's viewpoint Additionally, the research examines significant disputes in both international contexts and Vietnam’s practices related to these topics Ultimately, the author aims to analyze the regulations within EVIPA and IIAs to elucidate these issues.
R ESEARCH M ETHODOLOGIES
To achieve all of the thesis's objectives, the author employs a variety of research methodologies, including analytical, synthesis theory, historical, assessing, and comparison methods
The analytical, historical, and synthesis theory methods will be used to study IIA provisions, synthesize, and analyze legal issues arising from those provisions
The methods for evaluating and comparing will primarily be used to identify differences and inadequacies in regulations between IIAs, EVIPA, and the legal perspectives of scholars around the world.
S TRUCTURE OF THESIS
This thesis is structured into two main chapters The first chapter explores the definition, classification, and content related to Foreign Economic Transactions (FET), as well as indirect expropriation and the right to environmental protection within the framework of international investment law The second chapter analyzes and assesses the connection between these concepts and their overarching goals.
This article explores the interplay between environmental protection measures in host states and investment protection principles outlined in the EVIPA It assesses the potential legal actions that EU investors may pursue against the Vietnamese government Furthermore, it offers recommendations for Vietnam regarding investment dispute resolution and strategic policy planning to enhance its investment climate while ensuring environmental sustainability.
OVERVIEW ON ENVIRONMENTAL PROTECTION RIGHT TOWARD FAIR
O VERVIEW ON F AIR AND E QUITABLE T REATMENT STANDARD IN I NTERNATIONAL
Most International Investment Agreements (IIAs) aim to protect investments that generate revenue and prevent host states from abusing these investments Typically, the provisions within IIAs favor investors over host states Among various investment standards, the Fair and Equitable Treatment (FET) standard is the most significant in contemporary IIAs, as it is widely included and frequently cited by foreign investors in Investor-State Dispute Settlement (ISDS) cases, often resulting in favorable outcomes for them.
1.1.1 The historical origin of Fair and Equitable Treatment standard
Research indicates that the foundation of Foreign Economic Trade (FET) regulations dates back to ancient Greece, where it was established on the principles of natural law This foundation has since evolved and been integrated into the national laws of various countries However, this thesis will specifically concentrate on examining the relevant aspects of these regulations.
5 Hanoi Law University (2017), supra note 3, p 80
The investment admission rules encompass critical standards, including non-discrimination principles like most-favoured-nation and national treatment They also include essential treaty obligations such as fair and equitable treatment, full protection and security, and safeguards against arbitrary actions Furthermore, these rules provide guarantees against uncompensated expropriations and stipulations regarding the transfer of funds.
The renowned Greek philosopher Aristotle (384-322 BC) established the foundational principles of natural law, which later influenced the development of fair and just treatment in the context of state self-defense against invasions This doctrine was further explored by philosophers like Marcus Cicero and Thomas Aquinas, emphasizing the importance of natural law in the rights of states.
The 8 FET standard was first acknowledged in national law in Germany and later recognized in European law when the European Court of Justice applied it as a general principle of European Community law to evaluate restrictions on human rights.
9 historical origin of FET standard based on the formation and development of the international investment
The concept of Fair and Equitable Treatment (FET) in international investment agreements (IIAs) can be traced back to early economic agreements, including the 1948 Havana Charter for an International Trade Organization and the Economic Agreement of Bogota, as well as U.S treaties on Friendship, Commerce, and Navigation Notably, the OECD's Draft Convention on Protection of Foreign Property, established on October 12, 1967, underscores the importance of FET by stating that each party must ensure fair and equitable treatment of foreign nationals' property, guaranteeing constant protection and security while prohibiting unreasonable or discriminatory measures that could impair the management, use, or enjoyment of such property.
Although those instruments were no binding at all, they laid the foundation for FETs in modern IIAs
Article 11(2) of the International Trade Organization emphasizes the importance of recommending and promoting bilateral or multilateral agreements to ensure fair and equitable treatment for enterprises, skills, capital, arts, and technology transferred between member countries This provision guarantees that foreign investments from all member states are protected and supported.
Article 22 of the agreement ensures that foreign capital is treated equitably, prohibiting states from implementing unjustified or discriminatory measures that could undermine the legally acquired rights or interests of foreign nationals in their investments, skills, technology, and enterprises.
After the First World War, 11 FCN treaties were established to serve as a standard reference for international law, aimed at safeguarding the rights and property of aliens from discriminatory practices in foreign markets These treaties outlined specific terms to ensure equitable treatment for foreign nationals.
"equitable" and "fair and equitable treatment" are used to safeguard against State action that violated internationally accepted norms
12 UNCTAD (2012), “Fair and Equitable Treatment, UNCTAD Series on Issues in International Investment Agreement II”, United Nations, p 5
1.1.2 Definition and content of Fair and Equitable Treatment standard
The Fair and Equitable Treatment (FET) standard serves as a comprehensive protection mechanism for foreign investors, distinguishing itself from relative standards like Most-Favored-Nation (MFN) and National Treatment (NT), which lack objective guarantees Unlike these relative standards, FET ensures that foreign investors receive adequate treatment regardless of how the host state treats its own investors or those from other countries As a flexible catch-all provision, FET is frequently invoked in international investment disputes, often filling gaps left by more specific standards, even when investors cannot prove violations of other International Investment Agreements (IIAs) Notably, over 80% of known Investor-State Dispute Settlement (ISDS) cases allege FET violations, making it the most commonly cited breach in cases favoring investors.
The concept of Fair and Equitable Treatment (FET) lacks a unified definition due to its varying interpretations by ad hoc arbitral tribunals and its recognition in different International Investment Agreements (IIAs) According to Professor Muchinski, FET serves as a general framework for arguing that foreign investors have been mistreated, often due to discriminatory or unfair measures that adversely affect their interests.
It is, therefore, a concept that depends on the interpretation of specific facts for its content At most, it can be said that the concept connotes the principle of non-
13 Hanoi Law University (2017), supra note 5, p 119
14 Rudolf Dolzer, Christoph Schreuer (2012), Principles of International Investment Law, Oxford University Press, United Kingdom, p 122
15 UNCTAD (2020), International Investment Agreements: Reform Accelerator, OECD publishing, p 20
11 discrimination and proportionality in the treatment of foreign investors." 16 Accordingly, the meaning of FET standard is very broad and vague
The FET standard is a unified concept that encompasses both "fair" and "equitable" treatment of foreign investors, emphasizing the need for unbiased rules by host States This principle safeguards investors from arbitrary, discriminatory, or abusive actions, such as unjust license revocations, unfair sanctions, or barriers to business operations The expansive nature of the FET means that various forms of government conduct—whether legislative, administrative, or judicial—can potentially violate this obligation.
The Fair and Equitable Treatment (FET) standard is recognized by many scholars as a key component of the minimum standards for the treatment of foreigners and their property under international law A notable example supporting this perspective is found in Article 1105.1 of NAFTA, which mandates that each party must provide treatment to the investments of investors from another party in accordance with international standards.
16 Peter T Muchlinski, (1995), “Multinational Enterprises and the Law”, The Oxford Press, p 625
17 Rudolf Dolzer, Christoph Schreuer (2012), supra note 14, p 122
18 August Reinisch (2008),” Standards of Investment Protection”, Oxford University Press, United Kingdom, p 111
19 Azernoosh Bazrafkan, Alexia Herwig (2016), “Reinterpreting the Fair and Equitable Treatment Provision in International Investment Agreements as a New and More Legitimate Way to Manage Risks”, European Journal of Risk Regulation, p 441
20 OCED, (2004), Fair and Equitable Treament Standard in International Investment Law, OCED Publishing, OCED Working Papers on International Investment, p 12
The international minimum standard is a customary international law norm that outlines essential principles for the treatment of foreign nationals and their property This standard mandates that all States, irrespective of their domestic laws and practices, must adhere to these minimum requirements when interacting with aliens.
12 law, including fair and equitable treatment and full protection and security” As a result, FET standard in NAFTA is clearly treated as part of the minimum standard
The Fair and Equitable Treatment (FET) standard is a complex concept that extends beyond the minimum requirements of international customary law, incorporating a variety of international law sources, including general principles and modern treaties Some perspectives argue that FET is an independent standard, distinct from international law, leading to ongoing debates, particularly as more arbitral awards assess claims of denial of fair and equal treatment Given the diverse interpretations of the FET concept, different types of FET standards exist in International Investment Agreements (IIAs), which can include unqualified formulations, FET linked to international law, FET tied to the minimum standard under customary international law, and FET with additional substantive content Furthermore, the liability threshold for state conduct is determined by the specific language used in the FET clause.
O VERVIEW ON I NDIRECT E XPROPRIATION IN I NTERNATIONAL I NVESTMENT L AW
Expropriation in international investment law refers to the host state's taking of property from its owner, typically for economic or public purposes It primarily manifests in two forms: direct and indirect expropriation While direct expropriation is officially recognized in legal documents and is becoming increasingly rare, indirect expropriation has emerged as a contentious issue within the field This thesis specifically examines indirect expropriation, which is prevalent in contemporary dispute practices.
Basically, indirect expropriation has the same effect as direct expropriation, both are acts of the host State to interfere with the use or benefit of investors' assets
45 For example, Duke Energy v Ecuador case
46 Nguyen Xuan My Hien, supra note 34
Indirect expropriation differs from direct expropriation as it results in a significant deprivation of an investment without formal title transfer or outright seizure This form of expropriation occurs through measures that, while not officially denying investor status, substantially impact the investor's assets, limiting their management and control, and significantly diminishing the investment's value.
The 1992 World Bank Guidelines on “Expropriation and Unilateral Alterations or Termination of Contracts” 49 as well as the 1994 Energy Charter Treaty 50 , were among the first instruments to address indirect expropriation
Most International Investment Agreements (IIAs) address both direct and indirect expropriation, but only a few explicitly define indirect expropriation A notable exception is Article 1110.1 of NAFTA, which provides a clear definition of this concept.
No Party is allowed to nationalize or expropriate an investment made by an investor from another Party within its territory, nor can it take any actions equivalent to nationalization or expropriation, referred to as "expropriation," unless specific exceptions apply.
NAFTA references "indirect expropriation," yet lacks a formal definition or criteria for identifying such acts Similarly, Article 4 of the Egypt-Germany Bilateral Investment Treaty (BIT) of 2005 outlines related provisions without offering explicit definitions.
47 UNCTAD (2012), Expropriation UNCTAD Series on Issues in International Investment Agreements II, New York and Geneva, p 7
48 Trịnh Hải Yến (2017), Textbook of International Investment Law, National Political Publishing House, Hanoi, p 259
According to Section IV(1) of the Guidelines, a state is prohibited from expropriating or partially taking foreign private investments within its territory unless it adheres to legal procedures, acts in good faith for a public purpose, ensures non-discrimination based on nationality, and provides appropriate compensation.
50 Article 13 provides that: “investments of investors of a Contracting Party in the Area of any other
Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation”
51 Article 4 in Egypt-Germany BIT (2005)
Investments made by investors from either Contracting State cannot be expropriated, nationalized, or subjected to measures equivalent to expropriation in the territory of the other State, except for public benefit and with compensation Consequently, the provisions regarding indirect expropriation in these International Investment Agreements (IIAs) tend to be ambiguous, with the determination of whether an act constitutes indirect expropriation often relying on the interpretation of the arbitral tribunal.
In general, the notion of indirect expropriation is usually referred to by using phrases such as “de facto expropriation”, "equivalent to expropriation", "tantamount to expropriation" 52 , “creeping expropriation”, “constructive expropriation”,
Indirect expropriation, often referred to as "disguised expropriation," "consequential expropriation," "regulatory expropriation," or "virtual expropriation," retains its core meaning regardless of the terminology used In the realm of international investment dispute resolution, indirect expropriation can manifest through various forms, including expropriation via administrative measures, legal frameworks, or through a series of actions taken over an extended period.
Recent International Investment Agreements (IIAs) increasingly include detailed provisions on indirect expropriation For instance, the US Model Bilateral Investment Treaty (BIT) defines indirect expropriation as actions by a Party that result in effects equivalent to direct expropriation, even without a formal transfer of title or outright seizure This definition has significantly influenced how subsequent IIAs define and interpret indirect expropriation.
According to UNCTAD, indirect expropriations are characterized by four key elements: (1) an act attributable to the State; (2) interference with property rights or other protected legal interests; (3) a significant degree of interference that results in the loss of value or control over the investment; and (4) the owner retains legal title or physical possession These criteria help assess whether a host state's actions constitute indirect expropriation, necessitating a case-by-case, fact-based evaluation.
1.2.2 Requirements for a lawful Indirect Expropriation
The majority of IIAs allow States to expropriate investments as long as the taking is effected according to the four following criteria: (1) For a public purpose;
Expropriation must adhere to four essential requirements: it must be conducted in a non-discriminatory manner, follow due process of law, ensure the payment of compensation, and apply equally to both direct and indirect expropriation While International Investment Agreements (IIAs) may vary in their wording, these fundamental conditions have remained consistent and are recognized as customary international law.
The public purpose requirement ensures that expropriation is driven by legitimate welfare objectives rather than private gain or illicit motives This principle is widely acknowledged across various legal systems.
International law recognizes the concept of public purpose, which may be expressed in various terms within International Investment Agreements (IIAs) or treaties These alternative formulations include "public benefit," "public interest," "public order and social interest," "internal needs," and "legal ends."
The concepts of “national interest,” “public necessity,” and “public purpose related to internal needs” vary across different legal cultures and languages, leading to a broad definition by host States The interpretation of public purpose often relies on the arbitral tribunal's assessment on a case-by-case basis Typically, public purpose aligns with meanings established in international law or customary law, particularly modeled after Article XX of GATT, and is further clarified through WTO dispute resolution, promoting consistency in its interpretation Additionally, some treaties reference domestic law to define public purpose, enabling tribunals to integrate relevant domestic legal interpretations into their analyses.
As a result, in each arose dispute, this creates a comprehensive interpretation of the concept of public purpose
The concept of public purpose significantly influences arbitral decisions regarding expropriation, as the initial intent behind the measure directly impacts the legitimacy of the public purpose claim Consequently, the effectiveness of expropriations is closely tied to whether the intended goals were achieved.
60 Hong Kong, China-Thailand BIT (2006) and Israel-Slovakia BIT (2001)
62 Chile-Philippines BIT (1997) and Malaysia-United Arab Emirates BIT (1992)
22 made but not made for public purposes are not permitted if the property is taken up in the future to serve a public purpose
E NVIRONMENTAL P ROTECTION RIGHT IN I NTERNATIONAL I NVESTMENT L AW
Environmental Protection right in International Investment Law
Foreign investment and environmental protection are crucial components of sustainable development within international investment law Recently, the rise of Investor-State Dispute Settlement (ISDS) mechanisms has highlighted growing concerns regarding environmental issues This situation stems from the imbalance between the rights of foreign investors and the host state's authority to enforce environmental protections Investor apprehensions regarding national policies aimed at safeguarding the environment can adversely affect these protective measures Therefore, achieving a balance between the rights of investors and the environmental responsibilities of host states is essential in the realm of international investment law.
81 Article 3.1.(d), Bangladesh-United States BIT
83 Article IX(1)(b), The Belgium/Luxembourg-Colombia BIT (2009)
The imbalance between investor rights and a host state's environmental protection arises from traditional Free Trade Agreements (FTAs) that prioritize economic development and investment protection This focus can lead to significant environmental damage, particularly in developing countries, where host states struggle to address pollution consequences from investments While host states have the sovereign right and duty to implement regulations safeguarding society and the environment, they also face obligations to protect foreign investors' interests under various legal frameworks Consequently, environmental measures taken by host countries may be perceived as covert protectionism, often subordinated to international investment law This creates a conflict between domestic environmental regulations and international investment norms, referred to as "legitimacy conflicts."
The ambiguous and flexible interpretation of international investment law principles has allowed dispute settlement bodies to interpret agreement provisions clearly, while prioritizing the interests of foreign investors.
84 Suzanne A Spears (2010), “The Quest for Policy Space in a New Generation of International Investment Agreements”, Journal of International Economic Law, Vol 13, Issue 4, p 1037 - 1075
86 Jorge E Viủuales, “The environmental regulation of foreign investment schemes under international law” in P.-M Dupuy and J E Viủuales (2012), “Harnessing Foreign Investment to Promote Environmental Protection: Incentives and Safeguards”, Cambridge University Press
Many investors overlook the interests of host states, leading to an excessive surrender of 'policy space' in International Investment Agreements (IIAs) This situation has resulted in a "regulatory chill," where the fear of investor-state arbitration hampers domestic efforts to implement essential policies that are not directly related to investment.
Foreign investors often assert their rights to influence policies that serve the public interest of host states, leading to accusations against these states for breaching investment protection standards in investor-state disputes Such disputes commonly involve claims regarding the Fair and Equitable Treatment (FET) standard or allegations of indirect expropriation, particularly when host states implement environmental protection measures that impact the investors' investments.
The state's police power, as defined by Black’s Law Dictionary, refers to the authority of the state to impose restrictions on individual freedoms and property rights to safeguard public safety, health, and morals, while also enhancing public convenience and overall prosperity This doctrine encompasses various state actions, including the imposition of forfeitures or fines aimed at punishing or deterring criminal activities, as noted by Brownlie.
Seizure of property through taxation, legislation that limits property use regarding planning, environment, safety, and health, as well as defense against external threats, are critical aspects of property rights This includes the destruction of neutral property during military operations and the appropriation of enemy property as reparations for the repercussions of unlawful warfare, as defined in Black's Law Dictionary and Brownlie's acts.
89 Ian Brownlie (2008), “Principles of Public International Law”, Seventh edition, Oxford University Press, Oxford p 532
31 only understood as a rather broad meaning in international law, which is regarded as the foundation for police powers doctrine in international investment law
In international investment law, the police power doctrine refers to state measures that, while resulting in property loss, do not qualify as indirect expropriation and thus do not necessitate compensation This doctrine indicates that certain state actions are exempt from compensation under expropriation regulations, particularly when they pertain to essential public policy issues such as public order, health, environmental protection, and taxation Consequently, the police power doctrine is vital for upholding the host state's authority to implement public policies, ensuring a balance between the rights of investors and the interests of the host state.
The recognition of state police powers has a rich historical context, highlighted by key legal milestones such as the United States Supreme Court's decisions in 1915 and Federico Garcia Amador’s Fourth Report on State Responsibility to the International Law Commission in 1959 Additionally, this doctrine is referenced in the Harvard Draft Convention on the International Responsibility of States and the American Law Institute's Restatement of the Law in 1965, as well as its Third Restatement These foundational documents have significantly influenced the evolution and application of the police powers doctrine in International Investment Agreements (IIAs).
90 Catharine Titi, (2018), “Police Power doctrine and international investment law”, In Filippo Fontanelli, Andrea Gattini and Attila Tanzi (eds) General Principles of Law and International Investment Arbitration, Brill, 2018, p 324
Recent developments in investment treaties indicate a growing recognition of the state's police powers, particularly in new International Investment Agreements (IIAs) The Investment Agreement for the Common Investment Area of the Common Market for Eastern and Southern Africa (COMESA) explicitly acknowledges this doctrine by referencing the "right of states to regulate" alongside customary international law principles However, many treaties, including the US Model Bilateral Investment Treaty (BIT), do not explicitly mention police powers The US Model BIT states that non-discriminatory regulatory actions aimed at protecting public welfare, such as health and safety, typically do not amount to indirect expropriations This framework helps clarify what constitutes indirect expropriation across various BITs Overall, new generation IIAs are increasingly moving away from the sole effect doctrine and adopting a more nuanced approach to police powers.
The principle that a state is not liable for compensation to a dispossessed foreign investor when implementing general regulations within its police powers is now recognized as customary international law, as established in the Saluka Investments BV v Czech Republic case.
UNCITRAL, Partial Award, 17 March 2006, para 262
Article 20.8 of COMESA asserts that bona fide regulatory measures implemented by a Member State to safeguard legitimate public welfare objectives, including public health, safety, and environmental protection, are not considered indirect expropriation, in line with states' rights to regulate and customary international law principles on police powers.
95 Annex B of the US Model BIT (2012)
96 Armenia–Singapore Agreement on Trade in Services and Investment (2019), Annex 3-A, para 3(b); ASEAN–Hong Kong, China SAR Investment Agreement (2017), Annex 2, para 4; Burkina Faso –Turkey BIT
(2019), Art 6.2; Canada–EU CETA (2016), Annex 8-A, para 3; China–Republic of Korea FTA (2015), Annex 12-B, para 3(b); CPTPP (2018), Annex 9-B, para 3(b); EU–Singapore Investment Protection Agreement
In 2018, various international agreements and treaties were established, including the EU–Vietnam Investment Protection Agreement and the United Arab Emirates–Uruguay BIT, which address important aspects of investment and expropriation Notably, the PACER Plus agreement and the USMCA also outline specific provisions regarding investment protection These agreements, detailed in their respective annexes and paragraphs, reflect a growing emphasis on safeguarding investments across different regions, as highlighted by UNCTAD statistics.
(2020), International investment agreements reform accelerator, New York and Geneva: United Nations, p.25
The relationship between the essential elements and the police powers clause remains to be fully interpreted However, this list may serve as a basis to argue the existence or absence of exceptional circumstances that permit deviation from established doctrine Additionally, the police powers doctrine is not influenced by the nature of the investment interference; if it were limited to expropriation standards alone, investors could still pursue claims for violations of other standards, such as Fair and Equitable Treatment (FET).
The police powers doctrine serves as a crucial limitation on international investment law's constraints regarding environmental regulation Currently, this doctrine is recognized for protecting environmental regulations, but it does not extend to specific environmental measures that often lead to indirect expropriation cases Unlike general regulations, targeted measures apply to individual companies, typically manifesting through actions like the denial or non-renewal of permits, as seen in the Chemtura v Canada case involving the suspension and cancellation of pesticides While the police powers doctrine primarily addresses liability rather than compensation, it may still apply in instances of expropriation.