Police Powers Doctrine

I. Definition
1.
The police powers doctrine provides that a State possesses an inherent right to
regulate in protection of the public interest and does not act wrongfully when,
pursuant to this power, it enacts bona fide, non-discriminatory and proportionate
regulations in accordance with due process.1
II. Related Wiki Notes
2.
State regulatory power on the relationship between the State’s right to regulate and
different standards of protection, including fair and equitable treatment, full
protection and security, etc.
Public interest for a general overview of treaty practice and interpretation on the
State’s right to regulate in the public interest.
Right to regulate in expropriation and Regulatory expropriation for additional
analysis of the State’s right to regulate in expropriation.
III. Relationship between the police powers doctrine and the State’s general
right to regulate
3.
Although the State’s right to regulate may be taken into account in evaluating a
variety of claims, some tribunals have held that the police powers doctrine only
applies as an affirmative defense to expropriation claims.2
IV. Relationship between the police powers doctrine and expropriation
4.
The police powers doctrine is most often relied upon to distinguish between
compensable expropriation and non-compensable regulatory measures.3 In this
context, the police powers doctrine may replace or be applied alongside the sole
effects doctrine4 or a stand-alone proportionality analysis.5 The doctrine is distinct
from, and should not be confused with, the “public purpose,” “public interest” or
public necessity”6 requirements for lawful expropriations7 contained in
international investment agreements.8
V. Sources of the police powers doctrine
A. Customary international law
5.
The police powers doctrine has been recognized as a principle of customary
international law.9 Tribunals10 frequently note its inclusion in the 1961 Harvard
Draft Convention on the International Responsibility of States for Injuries to
Aliens,11 and the United States Third Restatement of the Law of Foreign Relations
in 1987.12
6.
The Tribunal in Philip Morris v. Uruguay observed that, since 2000, “a range of
investment decisions have contributed to develop the scope, content and conditions
of the State’s police powers doctrine, anchoring it in international
law.”13 Nonetheless, a number of commentators have disputed the customary
international law nature of the police powers doctrine.14 Various tribunals have also
emphasized the limits of the doctrine,15 in particular where explicit guarantees had
been given to the investor.16
B. Treaty practice
7.
Certain treaties explicitly reference the “police powers” exception 17 or invoke the
doctrine through other language that distinguishes expropriatory measures from
non-compensable regulatory measures.18 See Expropriation, Section II. However, if
the tribunal considers the doctrine to form part of customary international law, the
State will be allowed to rely on the doctrine even if it is not expressly incorporated
into the treaty in question.19 See further State regulatory power.
VI. Conditions that must be satisfied in order for a measure to fall within the
scope of the police powers doctrine
8.
Although there is no exhaustive test for determining whether a State acted within
its legitimate police powers,20 tribunals have posited that its measures should
be bona fide, non-discriminatory, proportionate and enacted in due process.
Generally, the question of whether a measure crosses the line separating non-
compensable regulatory activity from expropriation must be assessed in light of all
the circumstances, and “[t]he context within which an impugned measure is
adopted and applied is critical to the determination of its validity.” 21
A. A bona fide measure for the protection of public welfare
9.
To constitute a legitimate exercise of police powers, the measure must be bona
fide and enacted for the purpose of protecting public welfare.22 In assessing
whether this condition is satisfied, tribunals often analyse contemporaneous
evidence of the government’s decision-making process and the information on
which the decision to adopt the measure was based.23 The State’s compliance with
its internal laws may also be relevant.24
10.
Arbitral jurisprudence suggests that, while the government’s conduct subsequent to
the adoption of the measure may be taken into account, the focus of the inquiry is
on the government’s contemporaneous motivation: a post-hoc public welfare
justification will not suffice.25
11.
Importantly, the police powers doctrine will only apply to measures adopted in the
pursuit of certain types of public welfare objectives.26 Upon reviewing the relevant
case law, the Tribunal in Magyar Farming Company Ltd v. Hungary observed that
a measure annulling a claimant’s vested rights can only be exempt from the duty to
compensate if the measure falls within one of two broad categories, namely:
a. “generally accepted measures of police powers that aim at enforcing
existing regulations against the investor’s own wrongdoings, such as
criminal, tax and administrative sanctions, and revocation of licenses and
concessions”;27 and
b. “regulatory measures aimed at abating threats that the investor’s activities
may pose to public health, environment or public order [. . .] such as the
prohibition of harmful substances, tobacco plain packaging, or the
imposition of emergency measures in times of political or economic crises."28
12.
The Tribunal in Magyar concluded that the measure in question was passed as part
of a change to agricultural land holding policy.29 While the measure “purportedly
benefitted Hungarian society as a whole,” it did not fall into any of either of the
above-mentioned categories and was therefore compensable.30 See also Public
interest, Taxation.
B. Non-discriminatory
13.
The police powers doctrine does not apply to discriminatory measures that cause
an investor to be treated less favorably than other investors in like circumstances
without reasonable or legitimate justification.31 A majority of tribunals consider
that a measure may be discriminatory even if the State did not intend to
discriminate against the claimant.32 See further Non-Discrimination
(Expropriation), Section VII.
14.
It has been suggested that the police powers doctrine may only apply to regulations
of “general application” rather than measures concerning a specific
investor.33 However, this limitation on the doctrine is subject to debate, as targeted
measures will not necessarily fall foul of the principle of non-discrimination. 34
C. Proportionate
15.
In line with the growing recognition of proportionality as a general principle of
international law,35 some tribunals consider that the police powers doctrine only
encompasses measures whose impacts on investors are proportionate to the
pursued policy objectives.36
16.
Various different proportionality analyses have been discussed or applied in the
context of police powers, including:
a. an enquiry as to whether the measure is “obviously disproportionate”;37
b. the requirement of a “reasonable relationship of proportionality” between the
measure and aim sought to be realized by the measure;38 and
 c. an analysis of whether the measure is (a) suitable for achieving its legitimate
public purpose, (b) necessary for achieving that purpose in that no less
burdensome measure would suffice, and (c) not excessive in that its
advantages are outweighed by its disadvantages.39 However, it is clear that
tribunals accord States a greater degree of deference in relation to matters
involving the protection of public health or other “highly specialized
domains involving scientific and public policy determinations.”40
D. Enacted in accordance with due process
17.
A regulatory measure must be enacted in accordance with due process in order to
constitute a legitimate exercise of police powers.41 See further Due process in
Expropriation.