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

For the most part, tribunals have been reluctant to examine the motivations behind environmental regulations that interfere with investor rights. (143) Thus, when the Mexican government addressed the adverse environmental effects of a landfill by instituting an ecological decree to protect land used as a hazardous waste site, the tribunal held that the decree constituted an expropriation and that it "need not decide or consider the motivation or intent of the adoption" of the decree. (144) Similarly, in Tecmed the tribunal declined to examine the motivation or intent behind state legislation when the Mexican government had failed to renew the permit for a landfill site operated by a Spanish investor due to environmental and health concerns. (145)

Effectively, this line of reasoning ignores the police-powers exception and severely limits the state's ability to regulate in the public interest. In fact, when confronted with an investment arbitration, at least one government sufficiently doubted the applicability of the police-powers exception that it repealed the contested regulation even though it had been enacted for health and environmental reasons. (146)

A second line of reasoning, however, acknowledges the indisputable nature of a state's right to exercise its sovereign powers and notes that legitimate state regulations neither constitute an expropriation nor are compensable. (147) This line of reasoning demands a proportionality analysis to show that a state regulation is expropriatory. (148) In Tecmed, the tribunal determined that a state's regulatory actions or measures could only be characterized as expropriatory after examining whether the state actions or measures were

   proportional to the public interest presumably protected and to the
   protection legally granted to investments, taking into account that
   the significance of such impact has a key role upon deciding the
   proportionality. (149)

In adopting the proportionality analysis of Tecmed, the Azurix tribunal held that a regulation depriving an investor of his property must pursue a "legitimate aim in the public interest" and the means employed must be proportional to the "aim sought to be realized." (150) Both the Tecmed and Azurix tribunals also noted that, because foreign investors cannot participate in the democratic processes that produce the challenged measures, it may be reasonable for nationals to bear a greater burden in the public interest than non-nationals. (151)

Thus, under this second line of reasoning, the police-powers exception can only be invoked when the investor's ownership rights have not been completely deprived or where the state's regulations are proportional to the interest being protected. Moreover, proportionality should be assessed by considering the significance of the regulation's impact on the investment and the foreign investor's ability to participate in the creation of the state regulation. (152) Similarly, the police-powers exception is available only when the state can prove "some genuine interest of the public"; mere assertion of an interest is insufficient. (153) In effect, this line of reasoning emphasizes the regulations' impact on the investment and the investor's inability to participate in the process that created the contested regulation, to the detriment of any public interest being served.