Police Powers as a Defence to COVID-19 Liability: Does it Protect Host States?


Author: Satyajit Bose*

Jurisdiction:
International
Topics:
ICSID
Investment Disputes
Enforcement of Arbitral Awards
Arbitral Awards

In response to the outbreak of the Novel Coronavirus (“Covid-19”), States across the world have enacted a series of extra-ordinary measures. These range from social distancing guidelines and economic shutdowns to more controversial measures, such as trade and investment restrictions. However, what cannot be disputed is that all these measures have had a profound economic impact on foreign investors, and may potentially give rise to an avalanche of investment treaty claims. These claims may be based on numerous grounds, such as expropriation, fair and equitable treatment and so on.[1]

In tackling such claims, it has been suggested that the ‘police powers’ doctrine provides an avenue for States to avoid liability.[2] Simply put, the police powers doctrine stipulates that non-discriminatory measures that aim to achieve a public purpose will not give rise to a duty to compensate investors for loss incurred. While this argument appears to be fairly straightforward, it is in fact fraught with complications. Viewed as an expression of the State’s Right to Regulate, the precise nature and scope of the police powers doctrine is heavily contested and is a significant question within the broader debate on ISDS Reform. Accordingly, this post examines the police powers doctrine in arbitral practice and argues in favour of a broad interpretation of this doctrine while adjudicating claims arising out of Covid-19 regulations.

POLICE POWERS AS AN EXPRESSION OF STATE SOVEREIGNTY

The dominant understanding of the police powers doctrine is that it is an attribute of state sovereignty. Proponents of this view argue that the State has the sovereign power to regulate matters of public policy, such as public safety and health. This principle was most prominently articulated in the Restatement (Third) of the Foreign Relations of the United States, which reads, “A state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police power of states, if it is not discriminatory.”[3]

In the realm of international investment law, the police powers doctrine denotes a right through which the host-state can enact regulations in derogation of its investment obligations, as long as they pertain to a public policy objective. Newer generation investment treaties often expressly provide for the right to exercise police powers, such as the 2007 Investment Agreement of the Common Market for Eastern and South Africa (“COMESA”) Common Investment Area.[4] While this express provision is rarely present in older generation investment treaties, it has nevertheless been invoked as a rule of customary international law under Article 31(3)(c) of the Vienna Convention on the Law of Treaties (“VCLT”). The status of this doctrine as a custom was confirmed in the landmark case of Saluka v. Czech Republic, where it was held, “the principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are commonly accepted as within the police power of States’ forms part of customary international law today”[5].

ARE TRIBUNALS BOUND TO APPLY THIS DOCTRINE?

While many investment tribunals have applied the police powers doctrine as a customary rule of international law, this is not a settled position of law. In numerous cases, ICSID Tribunals have rejected the application of this principle, and have instead relied on the ‘solo effects doctrine’. As per this doctrine, the test to determine whether a regulation is expropriatory depends solely on the effect of the measure on the investment, rather than the objective with which it was enacted. In Vivendi v. Argentina, the Tribunal held that, “the effect of the measure on the investor, not the State’s intent, is the critical factor.”[6] Similarly, in Santa Elena v. Costa Rica, it was held that regulations framed to protect the environment were no different from other expropriatory laws, for which the State was obliged to compensate the investor.[7] The implication of this, as was observed by the Patrick Mitchell Annulment Committee, is that the Tribunal’s decision to apply the sole effects test instead of the police powers doctrine is an expression of its ‘freedom of judgement’, and is not a ground for annulment.[8] This raises significant doubts as to whether the police powers doctrine is a rule of customary international law, and will be applied in cases without an express provision in the investment treaty.

If Tribunals constituted to hear Covid-19 claims opt to apply the solo effects test, this will inevitably lead to the finding of state liability for breach of investment obligation. However, it is proposed that the police powers doctrine ought to be applied in deciding potential Covid-19 claims as: first, this principle is almost universally accepted within municipal legal systems, which is evidence of extensive state practice in its favour; second, even if it isn’t applicable as customary international law, it may still be applied as a general principle of law within the meaning of Article 38, ICJ Statute; third, non-recognition of the police powers doctrine during a  global pandemic may result in non-enforcement of awards rendered in such proceedings by domestic courts on public policy grounds. On principle and policy, there appear to be sound basis to invoke this doctrine.

SCOPE OF REVIEW

Even if Tribunals choose to apply the police powers doctrine, the manner in which it will be applied remains ambiguous. There are two broad approaches to what constitutes a legitimate exercise of police powers: first, the reasonable nexus standard, as was followed in Philip Morris v. Uruguay;[9] second, the proportionality test, as was laid down in Tecmed v. Mexico.[10] Under the former, the exercise of police powers will not give rise to liability if it is reasonable. The test for determining whether a measure is reasonable is the existence of a sufficient correlation between the regulation and the public policy objective. Therefore, the burden on the State is significantly lower in comparison with the proportionality test, which requires balancing the economic impact on the investor with the benefit sought to be achieved. For example, in Tecmed, the Tribunal held that regulatory action for a public purpose would not exempt the State from investment obligations, particularly if the action “is sufficient to neutralize in full the value, or economic or commercial use of its investment.”[11]

The standard of review that a Tribunal adopts will prove to be extremely significant in adjudicating Covid-19 claims. As mentioned earlier, States have resorted to a variety of measures, such as nationalisation, compelling production, and screening requirements for foreign investments. All of these measures may potentially form the basis of a claim, for which the standard of review will be crucial. If the lower standard of reasonability is adopted, host States will not be held liable for damage suffered by investors as a limited nexus with public policy can be proved. On the other hand, if the higher standard of proportionality is followed, this may lead to greater liability for host States. In light of this, it is suggested that Tribunals adopt the lower standard of  reasonable nexus in adjudicating such claims for the following reasons: first, the State should be granted sufficient leeway in determining what measures it undertakes to stem the outbreak of the virus – there exists very little margin for error in public health pandemics and States have to err on the side of caution; second, a strict review of regulatory actions may further damage public confidence in the legitimacy of ISDS and strengthen the backlash against it. Therefore, a broad interpretation of the police powers doctrine is appropriate while adjudicating such claims.

CONCLUSION

The challenges arising out of the Covid-19 crisis may define the future of ISDS. If Tribunals choose to hold States liable for regulations aimed at preventing the spread of the virus, this may permanently damage public confidence in investment arbitration. In the long run, this would further strengthen the backlash against investment arbitration. In contrast, striking an appropriate balance between investor rights and the State’s right to regulate may go a long way in securing public confidence in ISDS, through appropriate recognition of the State’s Police Powers during Covid-19.

[1] Lucas Bento and Jingtian Chen, Kluwer Arbitration Blog,  Investment Treaty Claims in Pandemic Times: Potential Claims and Defenses, (April 8, 2020), http://arbitrationblog.kluwerarbitration.com/2020/04/08/investment-treaty-claims-in-pandemic-times-potential-claims-and-defenses/

[2] Nicholas J. Diamond, Kluwer Arbitration Blog, Pandemics, Emergency Measures, and ISDS, (April 13, 2020), http://arbitrationblog.kluwerarbitration.com/2020/04/13/pandemics-emergency-measures-and-isds/

[3] Restatement (Third) of the Foreign Relations of the United States, §712, Comment g (Am. Law Inst., 1987). This has been cited by numerous tribunals, see Marvin Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1, Award (Dec. 16, 2002), ¶ 105.

[4] Investment Agreement for the COMESA Common Investment Area, Art. 20 ¶ 9, May 23, 2007, https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/3092/download

[5] Saluka Investments BV v. Czech Republic, UNCITRAL, Partial Award (Mar. 17, 2006), ¶ 262.

[6] Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/97/3, Award (Aug. 20, 2007), para. 7.5.20.

[7] Compañia del Desarrollo de Santa Elena, S.A. v. Costa Rica, ICSID Case No. ARB/96/1, Final Award (Feb. 17, 2000), ¶ 72.

[8] Mr. Patrick Mitchell v. Congo, ICSID Case No. ARB/99/7, Decision on the Application for Annulment of the Award (Nov. 1, 2006), ¶ 54.

[9] Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award (Ju. 8, 2006), ¶ 295.

[10] Tecnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award (May 29, 2003), ¶119.

[11] Id, ¶ 121.

*Satyajit Bose is a penultimate-year student at the National Law School of India University, Bangalore.