Regulatory Expropriation

NAFTA: The Expropriation and Regulation Relationship in Operational Terms

By Dr. Howard Mann and Dr. Julie A. Soloway (March 31, 2002):

What do we mean by the expropriation and regulation relationship? In our view, the debate centres on the extent to which the expropriation provisions of NAFTA can be used by investors to obtain damages for bona fide regulatory and legislative measures taken for public welfare purposes: Do the decisions to date support the concern about these provisions, or have such concerns been overstated?

This issue is important because it speaks to the heart of what governments do, that is, regulate in the public interest. If Article 1110 can be used to require governments to pay compensation to investors for adopting bona fide measures, this could have a chilling impact on the ability of governments to regulate, thereby compromising the protection of the environment, human health, etc.

The authors agree that the ability of government’s to undertake bona fide public welfare measures was not intended to be compromised by Article 1110. However, given the potential for environmental or other measures to be used for protectionist purposes or to transfer economic benefits for reasons not related to public welfare, it is important that we maintain the ability to protect against the abuse of regulatory power.

The issue of defining a bona fides measure is a critical issue to this process. The issue is therefore not simply one of form, but is rather one of substance. This means that there are no “blanket exceptions” from review for a measure just because of its form, i.e. an environmental regulation. This conclusion, however, does not dispose of the issue.

The Legal Issues Defined

With the above conceptual framework for the expropriation and regulation relationship established, this section identifies how this problem translates into the legal tests and issues raised by Article 1110 and the jurisprudence. This step, in turn, provides an introduction to our analysis of the current case law relating to these legal issues.
The Article 1110: Expropriation and Compensation, reads:

“No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (“expropriation”), except:

• for a public purpose;
• on a non-discriminatory basis;
• in accordance with due process of law and Article 1105(1); and
• on payment of compensation in accordance with paragraphs 2 through 6.Article 1110 sets out four conditions for a legal expropriation, including the payment of compensation according to standards set out in paragraphs 2-6 (not reproduced above). However, it does not set out any tests for what actually constitutes an expropriation that falls within the terms of Article 1110. Consequently, the first issue to be addressed is the test used for determining whether a measure of any type constitutes an expropriation.”

As will be seen, however, establishing a test for expropriation does not by itself provide an answer as to whether there is a safe heaven for bona fide regulatory measures. Rather, an additional element that distinguishes such bona fide public regulatory measures from other measures requiring compensation is still needed. Under customary international law, this second issue was covered through the ” police powers”. There is no single definition of what constitutes a police power, but its scope is generally understood to include measures taken by a government under normal or common functions of governments to protect the environment, human health, consumer protection, regulate hazardous products, and so on. “Police powers”: “The power of the state to place restraints on the personal freedom and property rights of persons for the protection of the public safety, health, and morals, or the promotion of public convenience and general prosperity … The police power is the exercise of the sovereign right of a government to promote order, safety, security health morals and general welfare within constitutional limits and is an essential attribute of government.” (Black’s Law Dictionary, 6th ed, 1990).

A common thread is that such measures are designed to protect the public or public assets in general from harm that may arise from the acts of the regulated party.(General reviews of the evolution of the police powers rule can be found in, e.g., Rudolph Dolzer, “Indirect Expropriation of Alien Property”, 1 ICSID Review – F.I.L.J. 44-65 (1986); and Paul Comeaux & Stephen Kinsella, Protecting Foreign Investment Under International Law, 1997, pp. 3-15). “Liability does not arise from actions that are non-discriminatory and are within the commonly accepted taxation and police powers of states.”(George Aldrich, “What Constitutes a Compensable Taking of Property? The Decisions of the Iran-United States Claims Tribunal”, 88 AJIL 585-610 at 609 (1994))

The authors accept that there remains some uncertainty as to what exactly falls within the police powers rule, much as there remains uncertainty as to what falls within the rule on expropriation itself. The recognition that the issue is a question of substance rather than form does, however, help ensure that individual cases will be potentially reviewable on this point, which would allow bona fides regulation to remain free from liability and ensure any abuses are checked. In addition, there may well be some differences as to what constitutes the scope of police powers within different states that might need to be taken into account in any given case.

Nonetheless, our second question in the analysis of the cases is whether Article 1110 does in fact leave sufficient room for the application of the police powers rule as set out in customary international law, and hence for the exclusion of bona fide public welfare measures from the liability for compensation.

The third issue we will look at, though more briefly, is the type of property rights that have been viewed by panels as capable of expropriation. Simply stated, the broader the scope of protected property rights, the broader the range of regulatory measures that can be covered by Article 1110. This raises the importance of addressing the previous two issues, and the relationship between them.

In summary, the three specific legal issues to be explored below are:

• What is the legal test for expropriation found in the jurisprudence?
• What is the test for the application of the police powers in the jurisprudence?
• What is the scope of protected property rights in the jurisprudence?

One legal issue we will not be considering here is the interpretation of measures “tantamount” to expropriation. Absent a large change in direction from the current cases, which we do not believe is warranted, we accept that the use of this term in Article 1110 has not led to an expansion in and of itself of what constitutes an expropriation. There is no indication in the cases that this term can or will be used by itself to include regulations that would not have otherwise been included under Article 1110. This is confirmed in Pope & Talbot Inc. v. The Government of Canada Award on the Merits of Phase 2, (April 10, 2001), para. 96; and S.D. Myers, Inc. v. Government of Canada, In a NAFTA Arbitration under the UNCITRAL Arbitration Rules, Partial Award, (November 13, 2000), para. 286.