Recapturing public power: is investment arbitration's engagement of the public interest contributing to the democratic deficit?

Vanderbilt Journal of Transnational Law, May, 2008 by Barnali Choudhury

A third line of reasoning suggests, however, that disputes involving conflicts between investor rights and environmental concerns should be decided in favor of the environmental concerns. (154) In Methanex, a Canadian investor argued that California's ban on MTBE (155) was expropriatory as it affected the investor's production of methanol, a key component of MTBE. (156) California countered that the ban was necessary because MTBE was contaminating water supplies, posing both an environmental and a health risk to California residents. (157) In determining whether the ban was an expropriation for which the state was liable, the Methanex investment arbitral tribunal drew a clear distinction between expropriatory measures and public purpose regulations, holding that

   [a] non-discriminatory regulation for a public purpose, which is
   enacted in accordance with due process and which affects, inter
   alia, a foreign investor or investment is not deemed expropriatory
   and compensable unless specific commitments have been given by the
   regulating government to the then putative foreign investors
   contemplating investment that the government would refrain from
   such regulation. (158)

The Methanex tribunal therefore concluded that public purpose regulations, when enacted with due process and not discriminatory, are neither expropriations--even if they affect foreign investments-nor compensable. (159) Interestingly, the general police-powers exception found in many investment treaties allows public purpose regulations to affect investments, but only if adequate compensation is paid. (160) Thus, the Methanex line of reasoning broadens the scope of the police-powers exception beyond the texts of most investment treaties.

Following Methanex, the Saluka tribunal also adopted the ruling that economic injuries resulting from bona fide regulations within the police powers of a state are not compensable. (161) The tribunal observed that the adjudicator should determine whether particular state conduct constitutes valid regulatory activity. (162) Saluka thus requires tribunals to evaluate the public purpose of the state regulation rather than to defer to a state's assessment as to whether a particular regulation serves the public interest. (163)

However, because investment arbitration is devoid of a precedent system, (164) future tribunals are free to adopt any of the three lines of reasoning adopted in Santa Elena, Tecmed, and Methanex. Therefore, future tribunals considering expropriation claims involving environmental concerns may hold that the expropriation is unaffected by the purpose of the regulation, is subject to a proportionality analysis, or does not amount to a compensable interference. As a result, the requirements for and compensability of expropriations based on environmental regulations remain at issue.

(2) Non-Expropriatory Regulatory Interferences with Investments

Even when a state's actions in regulating for the public interest are covered by the police-powers exception, the state regulation may amount to a violation of other investment protections. Regulatory interferences with investments may still violate national treatment, (165) most-favored nation treatment, (166) or fair and equitable treatment provisions. (167)