1 Introduction
In 1634, amid waves of bubonic plague, the governor of Ancona suspected that the Venetian consul had spread information detrimental to local commerce. The governor seized the consul’s possessions and banished him ‘under pretence that, contrary to public prohibition, he had caused goods to be unloaded in a time of contagion’.Footnote 1 An imbroglio of infectious disease and economic insecurity thus occasioned the arbitrary treatment of a foreign national and his property. In the realm of diplomatic protection, Emer de Vattel advised that the ‘surest way’ to settle such matters was by ‘commercial treaty’; otherwise, ‘custom is to be the rule’.Footnote 2 Four centuries later, thousands of treaties provide substantive standards and consent to arbitration in the cognate realm of investment protection. But these treaties have not supplanted the customary rule that there is no State responsibility for reasonable regulation of foreign investment. Effectively a presumption derived from territorial sovereignty, this rule has manifested in investment jurisprudence through the police powers doctrine, the right to regulate, and a margin of appreciation. Foregrounding the presumption of reasonable regulation helps to situate these arbitral trends from a generalist perspective and provides the baseline for interpretation of investment treaties in another time of contagion: the COVID-19 pandemic and its economic aftermath.Footnote 3
Section 2 reviews the demand for governments to impose a moratorium on investment treaty arbitration amid the COVID-19 pandemic. Modern treaty practice, however, already recognises the right to regulate as an affirmation of the customary position that each State may reasonably regulate foreign investment without violating international obligations. Section 3 recalls how this regulatory dimension of territorial sovereignty endured throughout the mid-century debate over the standard of compensation for nationalisation and the rise of investment treaty arbitration. The police powers doctrine is singled out as a formulation through which tribunals impose the burden on claimants to prove that a regulatory measure was unreasonable before it may be addressed as an alleged expropriation. By recognising the link between police powers and territorial sovereignty, we may realise the potential scope of the customary presumption of reasonable regulation. Section 4 identifies how this presumption may be integrated in the interpretation of investment treaties, addressing whether modern treaties may operate as leges specialis. Reasonable regulation is nevertheless presumed under the standard of fair and equitable treatment (FET) by determining legitimate expectations in light of the State’s right to regulate or by applying a margin of appreciation. Section 5 reviews classical practice on the treatment of alien property in times of infectious disease and its contemporary lessons for investment treaty arbitration alongside the international health regulations of the World Health Organization (WHO), concluding that it should be very difficult to establish that an investment obligation has been violated by regulatory measures designed to mitigate the chronic character of today’s entwined crises.
2 Treaty and Custom in the COVID-19 Pandemic
From the outset of the COVID-19 pandemic, public health measures threatened to undermine the ordinary conditions for private enterprise; the Spanish government, for example, empowered the Minister of Health to requisition industrial property.Footnote 4 Rapidly, it became apparent that markets could not ‘self-regulate in relation to all conceivable social and economic shocks’, leading to ‘interventions on a scale last seen in World War II’.Footnote 5 Scholars and practitioners published bulletins on whether such measures might trigger obligations to compensate foreign investors.Footnote 6 In light of the mounting crises, however, NGOs called on States to address proactively their exposure to costly claims. The Columbia Center on Sustainable Investment (CCSI), for instance, recommended an immediate moratorium on investment treaty arbitration and a permanent restriction on claims related to ‘measures targeting health, economic, and social dimensions of the pandemic and its effects’.Footnote 7 The proposed moratorium would last until governments had agreed on principles to safeguard ‘good faith recovery efforts’.Footnote 8
CCSI’s proposal was consistent with past demands for States to protect their right to regulate in the public interest.Footnote 9 Yet, the concerns of civil society, like much of the scholarly literature, have concentrated on perceived pitfalls of investment treaties and arbitral institutions rather than the customary foundations for investment regulation.Footnote 10 The intergovernmental reform agenda, moreover, has focused on procedural and institutional aspects of investment treaty arbitration.Footnote 11 In other words, efforts to suspend or recalibrate the practice of investment treaty arbitration have oddly illustrated the normative resilience of substantive investment law,Footnote 12 while overlooking sources of applicable law that reinforce the international lawfulness of health, social, and economic measures. A more constructive intervention than CCSI’s proposed moratorium, therefore, would be to equip vulnerable polities with defence arguments derived from customary international law that might accommodate the dynamic character of regulatory measures amid chronic crises.Footnote 13
While acknowledging that regulatory powers originate in custom, Catharine Titi argues that the right to regulate should be understood narrowly as an express treaty provision permitting a State to regulate in derogation of its commitments.Footnote 14 But one should resist the reflex to rely on treaty exceptions, which reproduces the popular perception that investment obligations normally forbid ambitious regulation.Footnote 15 In reality, the basic aim of CCSI’s moratorium has long formed part of customary international law; by virtue of the police powers doctrine, governments may indeed adopt regulatory measures in good faith without compensating investors.Footnote 16 In modern treaties, moreover, parties have secured the presumptive lawfulness of their regulatory measures not by fashioning an exceptional right under treaty law, but by ‘reaffirm[ing] their right to regulate within their territories to achieve legitimate policy objectives’.Footnote 17 As governments struggle to confront the pandemic and its aftermath, it is timely to review the enduring relevance of custom as the wellspring of investment regulation.
3 Investment Regulation under Customary International Law
To unearth the customary roots of regulatory power, it helps to survey some historical foundations of investment treaty arbitration. Modern standards of treatment, enforceable originally through diplomatic protection, emerged out of transitions from formal empire towards post-colonial independence and from coercive intervention towards peaceful means of dispute settlement.Footnote 18 Digging through juridical strata, three layers underpin the importance of custom in the regulation of foreign investment. First, the mid-century debate over the standard of compensation for nationalisation situates investment treaty arbitration as a relatively recent exception to the customary principle of permanent sovereignty over natural resources (PSNR). Secondly, before and during that debate, the regulatory dimension of territorial sovereignty was reaffirmed through instruments acknowledging the State’s right to regulate and judicial dicta that investors bear the risk of regulatory change. Finally, the police powers doctrine is identified as an expression of territorial sovereignty by which investment tribunals may distinguish non-compensable regulation from compensable expropriation. By recognising the imbrication of police powers and territorial sovereignty, we may appreciate the general application of the customary presumption that reasonable regulation does not engage State responsibility to compensate foreign investors.
3.1 Exceptional Character of Investment Treaty Arbitration
A debate over compensation for nationalisation flared up in the era of decolonisation, framed by newly independent States as a manifestation of their PSNR.Footnote 19 Now a recognised principle of customary international law,Footnote 20 PSNR was a ‘linchpin’ of the movement for a New International Economic Order.Footnote 21 Through the 1974 Charter of Economic Rights and Duties of States (CERDS), the movement sought to fortify the economic content of self-determination by embedding a standard of ‘appropriate compensation’ in domestic jurisdiction.Footnote 22 But an earlier formulation of PSNR in the widely supported General Assembly resolution 1803 included the requirement of compensation ‘in accordance with international law’,Footnote 23 often decoded as ‘prompt, adequate and effective payment’.Footnote 24 Capital-exporting States defended this standard during the drafting of CERDS, opposing its ultimate adoption.Footnote 25 Subsequent awards reaffirmed that nationalisation remained subject to an international standard of compensation and the fundamental principle of pacta sunt servanda.Footnote 26 Indeed, resolution 1803 provided that ‘[f]oreign investment agreements freely entered into by or between sovereign States shall be observed in good faith’;Footnote 27 and that disputes over compensation should be settled ‘through arbitration or international adjudication’.Footnote 28 Consistent with their right of entering into international agreements,Footnote 29 States consented to prospective arbitration of investment disputes under contract, statute, or treaty.Footnote 30 By the 1990s, investment treaty arbitration had emerged as an overgrown exception to the principle of PSNR.Footnote 31 Yet, it must not be overlooked that the nationalisation debate generated a variegated grammar of sovereign rights.Footnote 32 While the right to expropriate is one dimension of sovereignty, its bounds often blur with the State’s right to regulate.Footnote 33
3.2 Regulatory Dimension of Territorial Sovereignty
Regulatory authority over foreign investment is an extension of the State’s plenary competence under customary international law to determine its internal priorities, often formulated as an expression of PSNR or the sovereign right freely to choose and develop an economic system.Footnote 34 Manifestations of regulation, as activities performed à titre de souverain, are often decisive in territorial disputes.Footnote 35 Indeed, the exclusive right to regulate, opined Max Huber in the Island of Palmas case, entails a corollary duty to regulate ‘in a manner corresponding to circumstances’.Footnote 36 This notion of correspondence implies that measures must be reasonable, reflected in contextual gradations of deference.Footnote 37 In Spanish Zone of Morocco Claims, given the State’s duty to maintain social order, responsibility for injury to foreign nationals was engaged only if local authorities acted in manifest abuse of their discretion; that is, beyond a margin of appreciation.Footnote 38 In the North Atlantic Coast Fisheries Case, moreover, Great Britain had a ‘duty of preserving and protecting the fisheries’ in its territorial waters, even though the United States had secured liberties for its nationals to exploit that resource.Footnote 39 British authorities enjoyed ‘the right to make reasonable regulations’ and the burden fell on the United States to prove that its liberties were violated by such measures.Footnote 40 These days, a State’s duty to regulate may be triggered by treaties and customary principles requiring the protection of human rights and the prevention of environmental harm, even beyond its territory.Footnote 41 The basic right and manifold duties to adopt reasonable regulations in the circumstances, however, derive fundamentally from territorial sovereignty over internal affairs, which vastly predates the articulation of PSNR.Footnote 42
In the Oscar Chinn Case, the Permanent Court of Justice held that ‘[f]avourable business conditions and goodwill are transient circumstances, subject to inevitable changes,’ including ‘the general trade depression and the measures taken to combat it’.Footnote 43 Throughout the nationalisation debate, moreover, Third World initiatives to establish an international regulatory regime for multinational corporations were resisted by capital-exporting States, which insisted that regulation was strictly for domestic jurisdiction.Footnote 44 The range of compensable expropriations, therefore, never encompassed any deprivation of property or economic disadvantage resulting merely from taxation, monetary reform, or regulatory measures.Footnote 45 Commentary to the 1967 Organisation for Economic Cooperation and Development (OECD) Draft Convention on the Protection of Foreign Property, for instance, acknowledged ‘the sovereign right of a State, under international law, to deprive owners, including aliens, of property which is within its territory in the pursuit of its political, social or economic ends’ and that to ‘deny such a right would be to … interfere with its powers to regulate’.Footnote 46 The power to regulate may include placing limits on activities, including their wholesale prohibition for legitimate purposes such as environmental protection.Footnote 47 The financial risk of such measures is accordingly borne by foreign nationals.Footnote 48 The customary position that any loss arising from reasonable regulation does not violate international law remains salient in contemporary investment jurisprudence, including through the police powers doctrine.
3.3 Development of the Police Powers Doctrine
While some depict the police powers doctrine as a recent innovation,Footnote 49 others have traced its deeper genealogy.Footnote 50 Derived from the Greek politeia, the notion of police as prudent regulation originated in administrative manuals of France and Germany, later adopted by William Blackstone and Adam Smith.Footnote 51 By the influence of Vattel,Footnote 52 police power as the conceptual basis for public regulation of private property evolved through the United States constitutional law and migrated to Argentina.Footnote 53 On the international stage, the concept featured in significant developments towards property protection: the jurisprudence of mixed claims commissions;Footnote 54 the 1930 Hague Conference;Footnote 55 the 1961 Harvard Draft;Footnote 56 scholarly debates;Footnote 57 the Restatements of Foreign Relations Law;Footnote 58 and the jurisprudence of the Iran-United States Claims Tribunal.Footnote 59 The police powers doctrine then entered investment treaty arbitration to shield measures from claims of indirect expropriation,Footnote 60 including health,Footnote 61 licensing,Footnote 62 environmental,Footnote 63 bankruptcy,Footnote 64 and financial regulation.Footnote 65
For two decades, investment tribunals have recognised the police powers doctrine as custom.Footnote 66 States reiterate that customary status in their submissions as respondents and non-disputing parties.Footnote 67 The resulting decisions, as ‘subsidiary means for the determination of rules of law’,Footnote 68 have further developed the ‘scope, content and conditions’ of police powers.Footnote 69 The doctrine effectively is a screening mechanism between the right to expropriate with compensation and the right to regulate without compensation.Footnote 70 While few treaties refer explicitly to police powers,Footnote 71 many now reflect the content of custom in interpretative annexes.Footnote 72 The Tribunal in Philip Morris v Uruguay rendered a typical formulation in its finding that branding restrictions and health warnings on cigarette packaging did not constitute indirect expropriation of intellectual property: ‘the State’s reasonable bona fide exercise of police powers in such matters as the maintenance of public order, health or morality, excludes compensation even when it causes economic damage to an investor’.Footnote 73
As Jorge Viñuales explained, ‘the lack of public purpose, discrimination, arbitrariness, due process, effects and/or prior specific assurances’ should be understood as ‘considerations of good faith’, which serve not as ‘cumulative requirements’ of the police powers doctrine but rather as ‘indicia guiding a broader assessment of regulatory reasonableness’ by reference to circumstances of the case and the applicable treaty standard.Footnote 74 While the standard of reasonableness gives leeway to arbitral discretion,Footnote 75 tribunals have applied that standard in a broadly deferential manner by requiring the absence of arbitrariness through some link between a rational policy and the adopted measure.Footnote 76
Not to be conflated with its domestic expression,Footnote 77 the police powers doctrine under customary international law is an operative formulation of the regulatory dimension of territorial sovereignty.Footnote 78 This nexus is evident in the Iron Rhine Arbitration, wherein the Netherlands ‘forfeited no more sovereignty than that which is necessary’ for Belgium to exercise it treaty rights and, thus, ‘retain[ed] the police power throughout that area,’ including the power to establish health, safety and environmental standards.Footnote 79 The Tribunal effectively presumed no derogation from territorial sovereignty, albeit conditioned by good faith and reasonableness.Footnote 80 While such presumptions have eroded in some contexts,Footnote 81 reaffirmation of regulatory powers in recent treaties has reinforced a general presumption that ‘investment treaties were never intended to do away with their signatories’ right to regulate’.Footnote 82
3.4 Customary Presumption of Reasonable Regulation
The principled starting point under customary international law, reflected in the police powers doctrine, is to presume that regulation is a reasonable manifestation of territorial sovereignty. ‘Presumptively’, recalled James Crawford, ‘the ordering of persons and assets is an aspect of the domestic jurisdiction of a state and an incident of its territorial sovereignty’.Footnote 83 In the Brewer, Moller and Co Case, moreover, the German-Venezuelan Commission endorsed the ‘uniform presumption of the regularity and validity of all acts of public officials’.Footnote 84 Rosalyn Higgins further referred to a ‘weighty presumption’ when measures are introduced by ‘normal legislative processes of a democratic parliament’.Footnote 85 This presumption’s contemporary relevance was reaffirmed by the partially dissenting arbitrator in Philip Morris v Uruguay, Gary Born, who endorsed: ‘the presumptive lawfulness of governmental authority under customary international law, as well as respect for a state’s sovereignty, particularly with regard to legislative and regulatory judgments regarding its domestic matters’.Footnote 86
Plainly, this presumption would be rebutted if a claimant proved that an impugned regulation was adopted in bad faith.Footnote 87 Several tribunals have also found that a State’s failure to comply with requirements of domestic law prevented its reliance on the police powers doctrine.Footnote 88 But the presumptive character of the police powers doctrine has significant implications for the burden of proof, given the party who asserts must prove.Footnote 89 If the doctrine was pleaded as an exception, tribunals might wrongly require the State to justify its regulatory measures.Footnote 90 In Servier v Poland, however, the Tribunal dismissed the claimant’s submission that the police powers doctrine was an ‘affirmative defence’ for which the respondent had to ‘prove the negative’ by demonstrating ‘an absence of bad faith and discrimination, or the lack of disproportionateness in the measures taken’.Footnote 91 The respondent had shown the domestic legal basis for its decisions not to renew marketing authorisations for pharmaceutical products.Footnote 92 The claimant thus had to prove that those decisions were inconsistent with a legitimate exercise of police powers.Footnote 93 While this burden allocation is surely correct, its basis is not merely evidential but rather reflects the customary presumption that each State is entitled to regulate in the reasonable pursuit of its priorities and may indeed be required to regulate in the circumstances, such as a duty to adopt legislation for the ‘protection of health and life of humans’.Footnote 94
Beyond the context of expropriation, the presumption of reasonable regulation is apparent in other customary rules, foremost the minimum standard of treatment.Footnote 95 The well-known Neer standard provides that ‘an unsatisfactory use of power included in national sovereignty’ amounts to ‘an international delinquency’ when conduct amounts ‘to an outrage, to bad faith, to wilful neglect of duty’ or ‘to an insufficiency so far short of international standards that every reasonable and impartial man would readily recognise its insufficiency’.Footnote 96 This formulation is often adopted to determine the content of the customary minimum standard or the related treaty standard of FET.Footnote 97 In Al Tamimi v Oman, moreover, the Tribunal observed that the ‘high threshold’ for breach of the minimum standard requires a claimant to ‘confront’ the State’s ‘margin of discretion in exercising its police powers to enforce its existing laws’.Footnote 98 Weaving together these strands, we may say there is a general presumption that a State is not responsible for loss suffered by a foreign investor as a result of reasonable regulation.
4 Integrating Custom through Investment Treaty Interpretation
This chapter has thus far bracketed the matter of how custom forms a part of applicable law in investment treaty arbitration. Most investment treaties require disputes to be determined in accordance with the treaty simpliciter or alongside rules of international law.Footnote 99 No treaty is a ‘self-contained closed legal system’; however, each must be ‘envisaged within a wider juridical context’ through the integration of ‘rules from other sources’.Footnote 100 This section explores how the police powers doctrine has been incorporated in arbitral reasoning through the principle of systemic integration, which permits the customary presumption of reasonable regulation to be taken into account generally in treaty interpretation. Modern treaties include bespoke protection of the State’s regulatory powers, which could operate as leges specialis. Arbitral recognition of the State’s right to regulate and a margin of appreciation, however, hints at the tacit integration of the customary presumption within the FET standard.
4.1 Systemic Integration of the Customary Presumption
One way of bringing custom into the interpretative process is by referencing a customary concept as the ‘ordinary meaning’ under Art 31(1) or as a ‘special meaning … the parties so intended’ under Art 31(4) of the Vienna Convention on the Law of Treaties (VCLT).Footnote 101 But, consider the obligation not to ‘take any measures depriving, directly or indirectly, investors … of their investments’.Footnote 102 The ordinary meaning of ‘measures’ is ‘wide enough to cover any act’ and ‘imposes no particular limit on their material content or on the aim pursued thereby’.Footnote 103 In Saluka v Czech Republic, however, the Tribunal considered that ‘the concept of deprivation’ allowed for integration of the ‘customary international law notion that a deprivation can be justified if it results from the exercise of regulatory actions aimed at the maintenance of public order’.Footnote 104 The Tribunal in El Paso v Argentina similarly interpreted an expropriation standard in light of custom, requiring the claimant to show that ‘general regulations are unreasonable, that is, arbitrary, discriminatory, disproportionate or otherwise unfair’ before determining whether they neutralised property rights to constitute indirect expropriation.Footnote 105 Rather than direct reference to custom, these tribunals interpreted the obligation in light of the distinction between compensable expropriation and non-compensable regulation embodied in the police powers doctrine, which served as an organising principle around which to structure the applicable standard and burden of proof.
The principle of systemic integration applied in Saluka and El Paso is the chief means by which the customary presumption of reasonable regulation may be incorporated in arbitral practice.Footnote 106 Under Art 31(3)(c) of the VCLT, an interpreter must take into account, together with context, ‘any relevant rules of international law applicable in the relations between the parties’, including customary rules.Footnote 107 But tribunals seldom formulate precisely the rule, its relevance, or its applicability between the parties.Footnote 108 For clarity, therefore, the presumption of reasonable regulation may be formulated as the rule that there is no State responsibility to compensate for reasonable regulation of foreign investment. The elastic element of reasonableness might provoke the complaint that norms of investment law are too nebulous to qualify as custom.Footnote 109 But the ‘inchoate character’ of a rule is ‘by no means fatal to its legal character’ so long as it generates ‘an adequate apparatus of precise principles’.Footnote 110 Investment treaty arbitration may well serve as that apparatus, transforming the customary criterion of reasonableness into determinate standards of review.Footnote 111 Tribunals need not address the elements of opinio juris and concordant practice, in any event, when investment disputes tend to concern the evolving content of custom rather than its formation.Footnote 112 Moreover, the presumption of reasonable regulation is a well-established expression of territorial sovereignty, for which general practice accepted as law is axiomatic. As a customary rule, therefore, it is applicable in relations among all States and would doubtless be relevant to any investment treaty standard.Footnote 113
4.2 Investment Treaties as Leges Specialis
The chapeau of Art 31(3) of the VCLT provides that an interpreter must take into account any relevant rules ‘together with the context’. Some argue that the sparse context of investment obligations supports the operation of investment treaties as leges specialis in respect of the police powers doctrine.Footnote 114 This view might support the ‘sole effect’ approach to indirect expropriation, which focuses on the deprivation caused by a measure regardless of regulatory intent.Footnote 115 But ‘the persistence of the regulatory powers of the host State is not the accidental result of the failure of investment treaties to eliminate them’, observed Vaughan Lowe; such powers remain ‘an essential element of the permanent sovereignty of each State over its economy’.Footnote 116
Given the reaffirmation of the right to regulate in modern treaties, the context of investment treaty standards should generally permit systemic integration of the customary rule that there is no State responsibility for reasonable regulation.Footnote 117 In Bear Creek v Peru, however, the Tribunal held that an express provision for general exceptions – modelled on Art XX of the General Agreement on Tariffs and Trade (GATT) – was ‘an exclusive list’ precluding the application of ‘other exceptions from general international law’, including ‘the police powers exception [sic]’.Footnote 118 The provision stated that ‘nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary … to protect human, animal or plant life or health’.Footnote 119 While these terms arguably imply a presumption in favour of such measures, the Tribunal imposed the burden of proving their necessity on the respondent.Footnote 120 That treaty exception, therefore, should not have precluded the presumptive operation of the police powers doctrine, given a lex generalis and a lex specialis should have the same character as either a device limiting the scope of a treaty obligation (by distinguishing a regulatory measure from an alleged expropriation) or an affirmative defence (for which a State bears the burden).Footnote 121
Another ground on which the Bear Creek Tribunal excluded the police powers doctrine was the ‘very detailed provisions’ on expropriation.Footnote 122 An interpretative annex materially provided:
Except in rare circumstances, such as when a measure or series of measures is so severe in the light of its purpose that it cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation.Footnote 123
Yet, these terms reflect custom, incorporating typical indicia of police powers and imposing upon claimants the burden of proving such measures are disproportionate.Footnote 124 Indeed, in Eco Oro v Colombia, the Tribunal held that an identical annex did not exclude but rather ‘reflect[ed] the more general doctrine of police powers in customary international law’, such that ‘awards on the police powers doctrine … may provide some guidance (by analogy)’ in ‘interpreting and applying the provisions’.Footnote 125 By entering investment treaties, States may well agree to transform the customary presumption into a more determinate test by specifying factors that arbitrators must address in their assessment of a measure’s proportionality in light of its purpose.Footnote 126 While an interpretative annex could thus operate as lex specialis in regard to indirect expropriation, the customary presumption would remain relevant in the interpretation of other standards, including full protection and securityFootnote 127 and protection against unreasonable and discriminatory measures.Footnote 128 Let us now consider the most frequently violated of all investment obligations.Footnote 129
4.3 Tacit Integration Through Fair and Equitable Treatment
The FET standard has long been criticised for arbitral expansion beyond textual warrant.Footnote 130 Tribunals adopted the framework of legitimate expectations, for instance, to determine whether a State acted unfairly.Footnote 131 Modern treaties have since narrowed the notion of FET to the customary minimum standard and thus the circumstances in which interference with expectations may violate investment obligations.Footnote 132 It is through the framework of legitimate expectations, however, that we witness further expression of the customary presumption of reasonable regulation as alpha and omega of the FET standard in the respective guises of the right to regulate and a margin of appreciation.
To establish that an expectation has been defeated, tribunals typically require a claimant to prove three interlocking elements: an unfulfilled commitment; reliance when the investment was made; and reasonableness of that reliance, allied to the first element where the commitment was implicit.Footnote 133 In El Paso, the Tribunal held that there can be ‘no legitimate expectation for anyone that the legal framework will remain unchanged in the face of an extremely severe economic crisis’.Footnote 134 Seldom do tribunals spell out the customary roots of such reasoning, treating the State’s regulatory authority as a matter of fact rather than a legal presumption. In Suez v Argentina, however, the Tribunal recognised that the police powers doctrine and the State’s right to regulate under the FET standard were in fact ‘duplicative’ inquiries.Footnote 135 In other words, each inquiry is a reformulation of the customary presumption tailored to a different standard.Footnote 136 Acknowledging the common source of the police powers doctrine and the right to regulate helps us better to understand the customary drivers of arbitral convergence on contextual inquiries into the reasonableness of government conduct, regardless of the applicable treaty standard.Footnote 137
An emerging consensus that the FET standard preserves the State’s right to regulate was complicated by disputes regarding fiscally prudent adjustments to renewable energy incentives.Footnote 138 The jurisprudence divided into ‘two schools of thought’ as to whether legislative regimes constituted specific commitments that guaranteed tariffs would not change.Footnote 139 Arguments based on the State’s right to regulate ‘miss the point’, quipped the majority in Greentech v Italy, when there were ‘repeated and precise assurances to specific investors’ that tariffs would remain fixed for two years.Footnote 140 In RREEF v Spain, however, the majority recalled that the absence of an express reference to the State’s right to regulate under the Energy Charter Treaty did not mean it was excluded from applicable law.Footnote 141 As a matter of principle, ‘an international obligation imposing on the State to waive or decline to exercise its regulatory power cannot be presumed’ absent an ‘unequivocal’ commitment; ‘more so when it faces a serious crisis’.Footnote 142 In the majority’s view, ‘there can be no doubt that States enjoy a margin of appreciation in public international law’.Footnote 143
The margin of appreciation is an established principle of the European Court of Human Rights (ECtHR) that has been adopted by several tribunals applying the FET standard.Footnote 144 The majority in Philip Morris v Uruguay held that such a margin required ‘great deference to governmental judgments of national needs in matters such as the protection of public health’.Footnote 145 Due to the complexity of scientific and policy assessments, the ‘sole inquiry’ was whether the measures were adopted with ‘manifest lack of reasons’ or ‘in bad faith’.Footnote 146 Partially dissenting arbitrator Born believed such a margin was ‘neither mandated nor permitted’ under international law, finding instead that treaty and custom required a ‘minimum level of rationality and proportionality’.Footnote 147 Yet, the concept may be viewed as another iteration of the customary presumption that Born himself endorsed.Footnote 148 A margin of appreciation serves as the final layer of deference in determining the reasonableness or proportionality of regulatory measures,Footnote 149 reflecting the epistemic advantage of local authorities and their relative proximity to mechanisms of accountability.Footnote 150 These practical and normative factors assumed real significance in the COVID-19 pandemic, which transpired as ‘a collection of national epidemics’ shaped by interwoven social and biological factors.Footnote 151
5 Reasonable Regulation in a Pandemic
Since the outbreak of COVID-19, the Bischoff Case has become a salient authority.Footnote 152 In 1898, Caracas police detained the carriage of a foreign national, which they supposed to have transported persons infected with smallpox. The police had acted on false information and eventually offered to return the carriage. Reflecting the customary presumption of reasonable regulation, the German-Venezuelan Commission held: ‘Certainly during an epidemic of an infectious disease there can be no liability for the reasonable exercise of police power, even though a mistake is made.’Footnote 153 This final section fleshes out that prescient dictum by reviewing the classical practice on diplomatic protection in times of contagion and its contemporary lessons for investment treaty arbitration, highlighting how tribunals may interpret treaty standards in light of another codification of reasonable regulation – the proportionality inquiry under Art 43 of the International Health Regulations (IHR).Footnote 154 The inherent limits of the IHR, however, mean that many claims arising from the COVID-19 pandemic and its economic aftermath should be resolved by integrating the customary presumption of reasonable regulation through the police powers doctrine, the right to regulate, or a margin of appreciation.
5.1 Classical Practice
The eminent digests contain a cluster of cases in which the British Foreign Office and the United States Department of State held that injury to property during an epidemic did not entitle a foreign national to compensation. In 1875, the destruction of property by Turkish authorities to combat plague entitled British nationals to compensation only if local subjects were compensated.Footnote 155 Similarly, in 1894, Brazilian authorities destroyed the watermelon crop of the US nationals to prevent the spread of cholera.Footnote 156 The State Department found such measures were ‘justified under the circumstances’ and accepted the Brazilian view that any claims must go before local courts.Footnote 157 The apparent standard of national treatment reflected the ubiquity of epidemics and the reciprocal need to maintain discretion without hypocrisy.Footnote 158 There was nevertheless a reasonableness requirement. In the 1893 case of Lavarello, Italy was awarded partial indemnity of a trader’s travelling expenses and spoilage of his merchandise because Cape Verdean sanitary authorities had exceeded their powers and arbitrarily withdrew an initial order permitting him to unload.Footnote 159 In Bischoff, moreover, the State was ‘liable for damages for the detention of the property for an unreasonable length of time and injuries to the same during that period’.Footnote 160 The unlawful conduct of injured foreigners was also a relevant factor in the reasonableness inquiry.Footnote 161
The limits of reasonable regulation in the time of cholera were well articulated in the 1861 case of the Azorian, a British vessel that was ordered by local authorities in Tenerife to perform quarantine despite its clean bill of health upon departure. The Queen’s Advocate complained:
The fact of the ‘Azorian’ (alone) being treated in this unjust manner without any bonâ fide reason, and whilst free communication was taking place between London and all Parts of Spain, by land and sea, is so unreasonable, and primâ facie indefensible, that the mere assertion of the technical legal power of the Board of Health to do as it did will not satisfy the British Government.Footnote 162
There had been no ‘symptom of disease on board during the voyage’; Spain did not even pretend that the ‘arbitrary and unjustifiable’ quarantine measure was ‘necessary to prevent infection, or that it was done in every (or any) other case’.Footnote 163 In a neglected passage of his leading monograph, Martins Paparinskis addressed the Azorian as an exemplary case of the distinction between compensable and non-compensable measures in State practice of the nineteenth century.Footnote 164 He accordingly adopted the Azorian case as a yardstick of classical customary law in his assessment of the modern jurisprudence on property rights in the ECtHRFootnote 165 and the Inter-American Court of Human Rights,Footnote 166 which he further linked to the formulation of arbitrariness by the International Court of Justice in the ELSI caseFootnote 167 and arbitral interpretation of the FET standard in Saluka.Footnote 168 Following the grain of the Azorian case, Paparinskis believed these authorities point towards a consistent method of examining regulatory measures that are alleged to have breached international law: deference to ‘the legitimacy of the purpose and means chosen to pursue it as such (unless they are entirely indefensible)’ coupled with ‘formal and procedural safeguards against abuse in their implementation (the absence of which permits a more critical engagement with the ends and means)’.Footnote 169
Tracing the classical practice concerning past pandemics through to modern customary law, therefore, strengthens the presumption of reasonable regulation; rebutted when a claimant proves that government conduct was unreasonable because, for instance, requirements of domestic law were arbitrarily applied, discriminatory, or knowingly violated.Footnote 170 A mid-century study observed that State responsibility would be engaged only ‘if health or quarantine regulations are imposed not bona fide to protect public health, but with the real, though unavowed, purpose of ruining a foreign trader’.Footnote 171 As Born would later put it, each State ‘possesses broad and unquestioned sovereign powers to protect the health of its population’.Footnote 172 As a further corollary of territorial sovereignty, however, Hersch Lauterpacht (in his work for the United Nations Secretariat) underscored each State’s ‘obligation to take measures both of a preventive nature and of active co-operation with other States against the spread of disease and epidemics’.Footnote 173 The pioneering instance of such cooperation was the 1851 International Sanitary Conference of a dozen European States on the ‘standardization of quarantine regulations’,Footnote 174 followed by six conferences before the first binding convention on infectious disease.Footnote 175 The World Health Assembly, composed of WHO Members, is the contemporary forum for intergovernmental cooperation, authorised to adopt regulations ‘designed to prevent the international spread of disease’.Footnote 176 Given that there are 196 parties to the IHR, it is highly likely that a tribunal would take into account any relevant rules in investment treaty claims arising from the COVID-19 pandemic, notably the restriction on additional health measures.
5.2 Current Prognosis
Two broad categories of regulatory response to the COVID-19 pandemic might give rise to an investment treaty claim: overreach and underreach.Footnote 177 Given the fear of regulatory chill animating CCSI’s proposed moratorium,Footnote 178 responsibility for alleged overreach has been our focus in this chapter.Footnote 179 It is nevertheless worth observing how the IHR sets both a floor and a ceiling for internationally lawful health measures. Parties are required to share information with WHO so the Director-General may determine whether an extraordinary event constitutes a ‘public health emergency of international concern’ (PHEIC),Footnote 180 posing ‘a public health risk to other States through the international spread of disease’ and ‘potentially requir[ing] a coordinated international response’.Footnote 181 Subject to procedural requirements,Footnote 182 the Director-General issues ‘temporary recommendations’, which may include ‘health measures’ to be implemented by a party experiencing the PHEIC or by other parties ‘without delay’ and ‘in a transparent and non-discriminatory manner’.Footnote 183 The obligation to implement recommended health measures thus serves as the regulatory floor.Footnote 184 Reflecting ‘the principles of international law’, however, the IHR reaffirms ‘the sovereign right to legislate and to implement legislation in pursuance of their health policies’ while ‘uphold[ing] the purpose’ of the IHR.Footnote 185 That purpose is, in a word, proportionality: the IHR were designed not merely ‘to prevent, protect against, control and provide a public health response to the international spread of disease’ but to do so in ways that are ‘commensurate with and restricted to public health risks’ and ‘avoid unnecessary interference with international traffic and trade’.Footnote 186
Elaborating upon the ceiling of proportionality, Art 43(1) provides that the IHR ‘shall not preclude’ parties from implementing ‘additional health measures’ in accordance with their domestic law and international obligations in order to achieve a ‘greater level of health protection than WHO recommendations’. Additional health measures, however, ‘shall not be more restrictive of international traffic and not more invasive or intrusive to persons than reasonably available alternatives that would achieve the appropriate level of health protection’. In determining whether to implement additional health measures, parties are required by Art 43(2) to base their determinations upon scientific principles; available scientific evidence of a risk to human health, or where such evidence is insufficient, the available information including from WHO and other relevant inter-governmental organisations and international bodies; and any available specific guidance or advice from the WHO. The IHR also must be implemented ‘with full respect for the dignity, human rights and fundamental freedoms of persons’.Footnote 187
Article 43 of the IHR bears a striking resemblance to Art 5.6 of the SPS Agreement,Footnote 188 under which a complaining member of the World Trade Organization (WTO) must establish that there is a reasonably available measure that achieves the responding member’s appropriate level of sanitary or phytosanitary protection and is significantly less restrictive to trade.Footnote 189 Without digressing into how WTO law should inform its interpretation,Footnote 190 it suffices to note that Art 43 of the IHR could be considered more relevant than custom in the interpretation of investment treaty standards.Footnote 191 Like the interpretative annex on indirect expropriation in Bear Creek and Eco Oro, the proportionality inquiry under Art 43 of the IHR is the applicable lex specialis for the regulation of infectious disease, setting a floor of recommendations and a ceiling of proportionality.Footnote 192 If WHO were to advance this position in an amicus brief,Footnote 193 a tribunal may be persuaded that the IHR determine the parameters of reasonable regulation during a PHEIC.Footnote 194
Yet there are limits to the relevance of the IHR. As defined under Art 1.1, ‘health measure’ means ‘procedures applied to prevent the spread of disease or contamination’, but excludes ‘law enforcement or security measures’. Restrictions on additional health measures are determined by reference to temporary recommendations during a PHEIC, which expire automatically after three months unless extended.Footnote 195 The proportionality inquiry under Art 43, moreover, balances additional health measures against restrictions on ‘international traffic’, defined under Art 1.1 as ‘the movement of persons, baggage, cargo, containers, conveyances, goods or postal parcels across an international border, including international trade’. This definition notably excludes cross-border flows of capital and financial instruments, let alone assets owned by foreign investors within a State’s territory; the IHR does even not cover the same subject matter as investment treaty arbitration.Footnote 196 Given these temporal and material limitations, the proportionality inquiry under Art 43 has minimal relevance for claims arising from the full gamut of regulatory responses to the social and economic disruptions caused by the COVID-19 pandemic.
In addition to the inbuilt limits of the IHR, it is important to recall that the principle of systemic integration is directed to the interpretation of investment treaties, not to the application of conflicting rules.Footnote 197 While the IHR may take general priority over custom in the regulation of infectious disease, an investment treaty is the product of (usually) bilateral negotiation in respect of investment promotion and protection, which may be considered a lex specialis in respect of the multilateral IHR.Footnote 198 Modern investment treaties increasingly make express provision for health measures and future treaties could actively seek to harness private capital towards public health goals through specialised mechanisms for settling health-related investment disputes.Footnote 199 In general, however, the proportionality inquiry under Art 43 of the IHR may be considered in certain claims arising from health measures during a PHEIC, but it does not supplant the customary presumption of reasonable regulation defended throughout this chapter and its manifestations in investment jurisprudence: the police powers doctrine, the right to regulate, and a margin of appreciation.
From its microscopic origin, the COVID-19 pandemic has spawned planetary crises of a social, economic, and fiscal character. Yet the State remains the locus of regulatory power in an international legal system founded on the rights and duties of territorial sovereignty. While all States are equal in their sovereignty, the asymmetric impact of the pandemic has exposed unequal institutional capacities. Past tribunals have accommodated local circumstances in determining the reasonableness of government conduct; ‘the heritage of the past as well as the overwhelming necessities of the present and future’.Footnote 200 In Philip Morris v Uruguay, the majority was satisfied that the FET standard did not ‘preclude governments from enacting novel rules’, even if these were ‘in advance of international practice’, provided they had ‘some rational basis’ and were ‘not discriminatory’.Footnote 201 Conversely, the Tribunal in Genin v Estonia found that procedures adopted by a central bank that fell short of ‘generally accepted banking and regulatory practice’ did not violate the FET standard in light of Estonia’s transition status and ‘the emergence of state institutions responsible for overseeing and regulating areas of activity perhaps previously unknown’.Footnote 202 Such factors must likewise inform how a diligent investor would reasonably expect governments to address the economic recession and social dislocation caused by the COVID-19 pandemic.Footnote 203 It should be very difficult for claimants to rebut the customary presumption of reasonable regulation without clear evidence of bad faith or discriminatory treatment, more so when threats to human rights convert the State’s right to regulate into a duty to regulate.Footnote 204
6 Conclusion
At the time of writing, the annulment committee in Tethyan Copper Company v Pakistan found that enforcement of an award of USD 5.9 billion would not compromise the ‘capacity to respond promptly and effectively to a pandemic’ despite Pakistan’s reliance on loans from the International Monetary Fund ‘to address the economic impact of the COVID-19 shock’.Footnote 205 If the committee’s insouciance were reflected in an award on the merits, that would surely provoke more calls for a moratorium or broader exceptions to investment treaty arbitration. The police powers doctrine, the right to regulate, and a margin of appreciation, however, are all examples of an ostensibly ‘new jurisprudence’ focused on finding ‘space for flexibility within the primary rules themselves’.Footnote 206 The customary presumption of reasonable regulation, as a longstanding expression of territorial sovereignty, is the underlying driver of these doctrines. While Art 43 of the IHR may have some relevance in determining the proportionality of health measures during a PHEIC, the economic aftermath of the pandemic presents a broader opportunity for governments, counsel and arbitrators to revive the general rule that there is no State responsibility for reasonable regulation of foreign investment. Investment treaty arbitration, rather than acting as an unmitigated constraint on regulatory powers, may both guard against arbitrary treatment by governments and transform the ambitious measures of successful respondents into lasting legal principle in the face of overbearing investors.
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