Michael Eylerts Investment Paper

International InvestmentLaw Michael Eylerts 19.6.2015
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To What Extent have Expropriation Provisions Become Restricted for
Purposes of Sustainable Development?
Michael Eylerts
Student Number: S2871173
19/06/2015

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Table of Contents
I. Introduction...................................................................................................................3
II. Defining Expropriation.................................................................................................. 4
III. Balancing Investment Protection for Aliens and Host State Regulatory Discretion.... 7
IV. Conclusion: Restricting Expropriation Standards...................................................... 11
V. Bibliography................................................................................................................15

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I. Introduction
The rise of the globalized world has come with a growing interdependence on foreign
investment for every economic region of the world, most clearly exemplified by the dramatic increase
in the number of bilateral and multilateral investment treaties signed during the 1990s and early
2000s1
. These treaties play an important role in the classification and identification of the rights and
responsibilities the State has with respect to the protection of the investor's rights. Despite a universal
understanding on the sovereign right of nations to regulate activities within their territory, the
assurance of economic equilibrium within a nation is tantamount to securing foreign investment2
.
Without guarantees of host state protection of foreign assets,foreign investors and other countries will
not risk the financing of projects that may later be entirely directly expropriated or indirectly
interfered with. Thus, a large trend in these bilateral and multilateral investment treaties has been to
create broad clauses on the prohibition of host state measures nationalizing or expropriating, directly
or indirectly, a covered investment. With the objective of adequately and fully isolating the foreign
investor from expropriation, these clauses may have the effect of restricting legitimate national
regulatory activity. This paper seeks to establish that despite an initial trend in over-inclusive
protective rights for foreign investment, the growing concentration on sustainable development has
begun to expound on the ability of host States to pass restrictive legislation for the purposes of human
rights and the environment.
However,in order to properly access the doctrine on direct and indirect expropriation, the
lack of a uniform international standard concerning compensable takings, requires an overview on the
varying definitions that exist in both Bilateral Investment Treaties (BITs) and Multilateral Investment
Treaties (MITs). Although specifically defined in a large number of international instruments,
controversy exists as to an international standard for compensation and the level of interference
necessary in the investment climate to warrant claims of governmental taking. Following, this paper
will determine the extent to which recent cases have illustrated the balancing of maximizing
investment protection and host state regulatory discretion. Finally, this paper will conclude that there
has been a trend towards limiting investor protection for purposes of ensuring the global pursuit of
sustainable development goals.
II. Defining Expropriation
1 United Nations Conference on Trade and Development, World Investment Report: Investing in the SDGs: An
Action Plan. 2014. Pp 20
2 Article 1 & 4, United Nations General Assembly, Resolution on the Permanent Sovereignty over National
Resources,1962. (Resolution 1803)

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International investment treaties are primarily designed with the intent of attracting foreign
investors with guarantees of stable economies and investment protection, offering substantive
protections from potential host state violations and recourse to international arbitration Tribunals.
However,a key attribute to nations' inherent right to sovereignty is the regulation of activities within
that territory, but such host state regulations may negatively affect ongoing investment projects.
Thus, investment treaties include provisions listing what would be considered expropriation, and
many refer to international standards of investment protection: fair and equitable standard of
treatment, international minimum standard of treatment,and full protection and security3
. These
doctrines represent customary norms that have emerged from international practice and represent the
balancing of investment protection and regulatory discretion. Initially, investment law was concerned
with direct expropriation and thus there were no concerns identifying the extent of the government
interference. However,the development of the law has seen the categorization of expropriation evolve
to include both direct and indirect takings, as well as a third category of anything "tantamount to an
expropriation"4
.
Furthermore, these three categories of expropriation have broadened the reach of the taking
doctrine from purely measures which directly transferred ownership of investment projects to
measures that do not necessarily transfer property ownership, but affect the regulatory discretion the
investor has with that project. This is seen in the earlier case law of the Iran-US Claims Tribunal,
wherein the Tribunal stated that "measures taken by a State can interfere with property rights to such
an extent that these rights are rendered so useless that they must be deemed to have been expropriated,
even though the State does not purport to have expropriated them and the legal title to the property
formally remains with the original owner"5
. When drafting the Convention on the International
Responsibility of States for Injuries to Aliens, Professors Sohn and Baxter defined a compensable
taking as not only an outright taking of property, but also any such unreasonable interference with the
use, enjoyment of, and disposal of property6
. So, not allowing an investor to fully reap the benefits
associated with his project could be a prerequisite for indirect expropriation, illustrating the broad
doctrine concerning the measure of impact that regulation must have.
Despite the varying understandings on the expropriation clauses,for such a taking to be
lawful, international instruments concur that the taking must have been for a public purpose,
conducted in a non-discriminatory manner, based on the basis of due process of law, and on the
3 Sornarajah, J. International Law on Foreign Investment. Cambridge University Press. 2010
4 NAFTA Article 110(1); US-Argentina BIT (2004) Article 6; ASEAN Comprehensive Investment Agreement
Article VI.
5 Starret Housing Corp v. Iran, 4 Iran-United States Cl. Trib. Rep. 154. 1983.
6 Louis B. Sohn & R.R. Baxter, Responsibility for Injuries to the Economic Interests of Aliens II. Draft
Convention on International Responsibility for Injuries to Aliens. 1961.

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payment of compensation7
. A 2006 study by the United Nations Conference on Trade and
Development found that most agreements included the four provisions determining a lawful
expropriation8
. With regards to expropriation, a discriminatory measure is one in which there is a
lack of a legitimate justification or is a means of arbitrary discrimination9
. However,the prohibition
on discrimination also applies to two other criteria listed: if it is discriminatory with regards to the due
process of law, or with regards to an unequal compensation scheme10
. Compensation is the most
controversial requirement for the legality of an expropriation, most clearly displayed by the lack of an
international doctrine standardizing the amount of compensation that should be paid. Similar to the
Tribunal’s analysis on public interest, the determination is on a case-by-case basis and is fact-specific.
Since the incorporation of indirect expropriation, the general payment of compensation has become a
debatable aspect because of the inherent difficulty in determining when regulatory actions can be
qualified as compensable. For instance, the Chile-Colombia BIT, "limits the protection granted in the
agreement to investments, corporeal or incorporeal, the financial backing of which is proved to be
legal..., this means that the host state may expropriate, or in this case confiscate,a foreign investment
without the obligation for compensation due to the illegality of the investment"11
.
That being said, the categorical approach to expropriation has resulted in heightened
controversy because of debates on whether or not the "tantamount to an expropriation" category, seen
both in NAFTA and ASEAN MITS, intended to add another meaning to expropriation "over and
above the reference to indirect expropriation"12
. This controversy was embodied in an earlier decision
by the NAFTA arbitral body in Metalclad v. Mexico, in which the Mexican government passed an
ecological decree prohibiting the construction of landfill site by the American company, despite
earlier assurances to the company that said project would proceed and the fact that the American
company had completed all necessary paperwork13
. In the Tribunal's holding, it stated that
expropriation under NAFTA includes not only "open, deliberate and acknowledged transfer of title in
favour of the host State,but also covert or incidental interference with the use of property"14
. Thus,
they found that the government regulation amounted to indirect expropriation because it prevented the
operation of the investor's facility, which had already obtained all of the necessary permits15
.
7 NAFTA Article 110(1); ASEAN Investment Agreement Article VI(1); Energy Charter Treaty, Article 3.1
8 Dugan, Rubins, Sabahi, Wallace. Investor-State Arbitration. Oxford University Press, Oxford, England. 2008
9 Attar, Li, Kessler, & Burnier. Expropriation Clauses in International Investment Agreements and the
Appropriate Room for Host State Regulations.Graduate Institute of International and Development Studies,
Geneva Institute: Centre for Trade and Economic Integration. 2009. Pp. 14
10 Id.
11 Id. Pp. 16
12 Waste Management Inc. v. United Mexican States.ICSID Case No. ARB(AF/00/3) Award. 2004. P 144
13 Metalclad Corporation v. United Mexican States,40 I.L.M., ICSID. 2000.
14 Id. P. 103
15 Id.

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Such a broad definition of expropriation has raised concerns on the effect it would have on
sustainable development pursuits by smaller and developing countries, considering the strain on
public finances that would ensue from paying such compensation awards. Within the NAFTA
framework, such a broad doctrine was used by American investors to challenge Canadian legislation
requiring a certain fee on excess softwood lumber exports. The arbitral decision in Pope & Talbot v.
Canada stated that for an expropriation to occur, there must exist a "substantial deprivation" of the
investor's property rights whereby the investor's "use, enjoyment and disposal of the property" is
interfered with16
. Among the criteria identified by the NAFTA tribunal in order to assess the extent of
the interference included whether the investor retained full control and ownership of the investment
project, whether the host state government managed the daily actions of the project, and whether the
host state government interfered with the paying of the project dividends17
.
Although the NAFTA tribunal heightened the threshold beyond which there is an obligation
to pay compensation, the international arena has not unanimously accepted the stricter doctrine. This
is seen in the 2004 case Waste Management Inc. v. United Mexican States,settled by the International
Centre for Settlement of Investor Disputes, wherein the ICSID tribunal determined that "tantamount
to an expropriation" was a sub-group of measures within the general framework of indirect
expropriation, adding to the meaning of expropriation18
. However,because these measures amounted
to what is commonly defined as "creeping expropriation", the incremental nature of these measures
makes it difficult to determine a concrete threshold in which a regulatory taking has actually
occurred19
. Thus, despite this 2004 holding, both the NAFTA and ICSID Tribunals have made more
recent rulings consolidating the stricter standard evidenced in Pope & Talbot. This can be seen in
NAFTA's Methanex Corporation v. United States of America, where the court ruled that non-
discriminatory measures taken in the public interest will almost never amount to an expropriation, and
ICSID's Corn Products International v. United Mexican States which followed a similarly strict
standard of "substantially complete deprivation"20
.
That being said, the international approach to expropriation varies based on the treaty being
interpreted and the case specifics. However,the development of tribunal decisions and the
amalgamation of such decisions, illustrates a consensus on the determination of when an
expropriation is legal: whether it was non-discriminatory, for the public interest, on the payment of
just compensation, and in accordance with the due process of law. Yet, the determination of when
16 Pope & Talbot Inc. v. The Government of Canada, UNCITRAL (NAFTA). 2001. P. 100
17 Id.
18 Waste Management Inc. v. United Mexican States.ICSID Case No. ARB(AF/00/3). 2004.
20 Methanex Corporation v. United States of America, NAFTA, Final Award. 2005; Corn Products International
v. United Mexican States, ICSID Case No. ARB(AF)/04/01. 2008

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compensation should be paid has been more controversial, as seen in the conflicting opinions on the
potential third category of expropriation. Thus, many countries have taken to redrafting their BITS to
ensure that expropriation is limited to solely direct and indirect takings21
.
III. Balancing Investment Protection for Aliens and Host State Regulatory Discretion
The obligation for the host state to compensate investors for the direct or indirect deprivation
of their property rights, is likely to deter smaller and developing countries from enacting and
implementing regulations in pursuit of sustainable development goals, because of the indirect effect
those measures may have on the costs of investment projects. Although recent tribunal decisions have
legitimized the regulatory discretion of the host state and have thus provided for a category of non-
compensable takings, the higher standard of "substantial" deprivation may still be breached by certain
environmental or social legislation. Moreover, depending on the tribunal's process,the balancing of
the state's rights and the investor's rights may be a matter solely dependent on the effect of the
measure. The most notable example of an effects-driven analysis was in Metalclad, wherein the
Tribunal found that the Mexican government had expropriated the foreign project by refusing to issue
the permits for the site22
. That being said, these doctrines still require that the host state compensate
the investor for measures that have a "substantial" effect,regardless of whether or not the objective of
the regulation is sustainable development, demonstrating the relative ease an effects-driven process
will result in the need for compensation. However,some arbitral awards have considered the
character and purpose of the host state's regulations, permitting measures pursued in good faith and
within the police powers of the state. Together with stricter standards on indirect expropriation, the
level of scrutiny used by the Tribunals will play a significant role in the whether investment law
remains concentrated on property rights or liberalizes protection for sustainable development
purposes.
Moreover, with a growing body of international law concentrating on environmental
protection, implementing legislation is required on the part of the ratifying parties to ensure their
domestic laws are in accordance with the evolving standards. Beginning with the 1972 UN
Conference on the Human Environment, the global community began to recognize the role the
community needed to play to ensure development was pursued responsibility. Following that, the
1992 Conference on Environment and Development resulted in the Rio Declaration, which listed
among its principles that "States shall cooperate in a spirit of global partnership to conserve, protect
and restore the health and integrity of the Earth's ecosystem"23
. Host state regulations raising social
21 US Free Trade Agreement with Central American and the Dominican Republic (DR-CAFTA), 2004. Article
6: Expropriation and Compensation, "Neither Party may expropriate or nationalize a covered investment either
directly or indirectly through measures equivalent to expropriation or nationalization".
22 Metalclad Corporation v. United Mexican States,40 I.L.M., ICSID. 2000.
23 Principle 7, Rio Decleration on Environment and Development. United Nations Conference on Environment
and Development, 1992.

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and environmental standards will involve direct and indirect interference with foreign investment
projects, such as to give rise to situations in which compensation is required and thereby making such
sustainable regulations unappealing. This is particularly the case when a country directly expropriates
land purchased by foreign investors for the purposes of conservation, as seen in Santa Elena v. Costa
Rica24
. Therein, the Tribunal found that the expropriation was non-discriminatory, for a public
purpose, based on the due process of law, and on the basis of compensation; however, the amount of
the compensation was evaluated incorrectly. Since the issue did not originate on whether
compensation should be paid, but rather on the amount to be paid, the Tribunal clearly suggested that
only the effect of the measure in question is relevant in assessing whether an expropriation took place
and the amount of compensation.
In addition, the Tribunal also stated that "while an expropriation or taking for environmental
reason may be classified as a taking for a public purpose, and thus may be legitimate, the fact that the
Property was taken for this reason does not affect the nature of the measure of the compensation to be
paid for the taking"25
. Along those lines, the Tribunal stated that the international source of the
obligations to pass those measures do not make any difference in the Court's decision-making and that
"no matter how laudable and beneficial to society as a whole" the measures may be, the obligation to
pay compensation remains26
. This effects-driven dicta was followed by ICSID three years later in the
holding of Tecmed v. Mexico, concerning Mexico's failure to renew the permit for Tecmed's landfill
for environmental protection purposes27
. The Tribunal recognizes that "the principle that the State's
exercise of its sovereign powers within the framework of its police power may cause economic
damage to those subject to its powers as administrator without entitling them to any compensation is
indisputable". Nonetheless, in its decision, the tribunal stated that "we find no principle stating that
regulatory administrative actions are per se excluded from the scope of the Agreement,even if they
are beneficial to society as a whole - such as environmental protection"28
. Evidently, despite the
legitimate and necessary aim of sustainable development goals, the legislation necessary to ensure
sustainable development has the effect of neutralizing the enjoyment of property rights to such an
extent that compensation will almost always be required for pursuing such legislation.
More recently, a line of cases has emerged in which the Tribunals have recognized that
certain good faith, bona fide regulations that are non-discriminatory and within the police powers of
the state,are non-compensable takings, no matter the effect. Inside the NAFTA framework,the
effects-driven test that initially began the expansionist practice of expropriatory categories, was
substantially limited in later holdings by the Tribunals. Beginning with Methanex, the NAFTA
24Compania del Desarrollo de Santa Elena SA v. Republic of Costa Rica, 39 ILM 1317. 2000
25 Id. P. 71
26 Id. P. 72
27 Texaco Medioambientales Tecmed, S.A. v. Mexico, Award, ICSID, ARB(AF)/00/02. 2003. P. 93
28 Id. P. 121

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Tribunals' began to analyze the character and purpose of the measures passed in order to determine
whether or not they required compensation29
. In Methanex, the American regulation prohibiting
imports of methanol, a chemical injurious to the public health, was found to be within the ambit of a
the state's police power because it was aimed at ensuring public safety and so was within the category
of public interest30
. Thus, despite the total prohibition on Methanex's product, the regulation fell
within the category of non-compensable takings31
. This was similarly seen in a decision by the
United Nations Commission on Trade Law (UNCITRAL) on Saluka v. Czeck Republic, in which the
investor alleged that it had been deprived of its investment without compensation32
. In this case,IPB
was a Czech bank that had been scrutinized by the Czech Nation Bank for several deficiencies and
because of the persistent failure of IPB to rectify these deficiencies, the IPB enterprise was transferred
to another Czech bank without compensation33
. The Tribunal reaffirmed international law, stating
that "States are not liable to pay compensation to a foreign investor when, in the normal exercise of
their regulatory powers,they adopt in a non-discriminatory manner bona fide regulations that are
aimed at the general welfare"34
. Furthermore, "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", is an
integral part of customary international law35
. Since the Czech regulation was aimed at the general
welfare and was a lawful regulatory action, the Tribunal found that no compensation was due36
.
Clearly, "the context within which an impugned measure is adopted and applied is critical to the
determination of its validity", illustrating a transition towards the balancing of the effect of the
measure and it's purpose and character37
.
Furthermore, few cases provide a generalexception for the obligation to compensate investors
for regulatory actions amounting to a direct or indirect expropriation, with many focusing on the
intent and context of the measure. However,such an exception has been identified in earlier NAFTA
cases,possibly identifying a realm of legislation where in sustainable development goals could be
pursued unimpeded. In S.D. Myers,the tribunal stated that "parties to the Bilateral Treaty are not
liable for economic injury that is consequence of bona fide regulations within the accepted police
powers of the State".38
Contrastingly, a few months prior, the Tribunal in Pope & Talbot expressly
stated that such a "blanket exception of regulatory measures would create a gaping loophole in
29 Methanex Corporation v. United States of America, NAFTA, Final Award. 2005
30 Id.
31 Id.
32 Saluka Investments BV (The Netherlands) v. The Czech Republic, UNCITRAL, Partial Award. 2006.
33 Id.
34 Id. P. 255
35 Id. P. 262
36 Id. P. 271
37 Id. P. 264
38 S.D. Myers Inc. v. Government of Canada, Partial Award, UNCITRAL (NAFTA). 2000. P 281

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international protections against expropriation" since countries could seek to escape the obligation to
compensate by disguising any expropriations as justifiable regulations39
. That being said, six years
later, the Tribunal in Azurix v. Argentina explicitly criticized the S.D. Myers decisions as
contradictory40
. The Tribunal stated that under the decision, the BIT required projects expropriated for
public purposes to be compensated, but did not require the same for similarly taken regulatory
measures that are instead equivalent to expropriation.41
As such, the Tribunal found that there needed
to be balancing between the public purpose criterion and the effect of the measures,illustrating the
case-by-case and fact-based analysis of non-compensable takings within the realm of governmental
regulatory action.
As such, severalrecent US and Canadian investment treaties have begun to introduce
characteristics of the balancing test,expressly calling for a balancing of the effect and the character of
the measure42
. The recent US Free Trade Agreement with Central America and the Dominican
Republic (DR-CAFTA),signed in 2004, requires a case-by-case and fact-based inquiry that considers:
the economic impact of the government action, the extent to which the government interferes with
invest-backed expectations, and the character of the government action.43
The Canadian model-BIT
provides that "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" unless the measures are so severe that they could not have been adopted in
good faith, suggesting a narrower threshold to pass but still requiring a fact-based inquiry44
. Another
example of this explicit incorporation is seen in the Colombian model-BIT, where it states that
beyond a case-by-case and fact-based inquiry, the determination whether a measure constitutes
indirect expropriation should consider the economic impact of the measure,the scope of the measure
and the possible interference with the expectations concerning the investment45
.
In this regard, the standard for determining the appropriate balance between investor-state
relations has varied in the development of international investment law due to the development of
what constituted expropriation. Beginning with an over-inclusive framework for maximizing investor
protection at the expense of host state regulatory discretion, the standard has become stricter with the
development of indirect expropriation in the arbitral decisions. As such, the standard has become less
oriented on the effect of the measure and more so on the character of the measures,the level of
interference with the investment project, and the investment-backed expectations of the investors.
39 Pope & Talbot Inc. v. The Government of Canada, UNCITRAL (NAFTA). 2001. P. 99
40 Azurix Corp v. Argentine Republic, ICSID Case No. ARB/0112, Award. 2006. P. 311
41 Id.
43 Chapter 10, Annex 10-C(4)(a)(i-iii). DR-CAFTA, 2004 .
44 Annex B.13(1)(c), Canadian model-BIT. 2004
45 Article VI(2)(b)(i-ii), Colombian model-BIT. 2007

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Thus, the greater the interference with the investment, the more likely the finding of compensable
expropriation; however, most bona fide regulatory actions of generalapplication, intended for the
public interest, will not likely result in the level of interference necessary to constitute a compensable
expropriation.
IV. Conclusion: Restricting Expropriation Standards
As a result of the increasing frequency with which investors challenged what the respondent
States argued to be legitimate regulatory measures,investment treaties and arbitration proceedings
received a backlash of public criticism due to the negative consequences on the environment, public
health and labor standards46
. Despite the gradual transition away from the earlier over-inclusive
doctrines on expropriation, the lack of international conformity in regards to the permissibility of
bona fide regulatory measures has influenced many state parties to rethink their involvement in
investment treaties and dispute mechanisms, as well as reformulate and remodel their investment
treaties. A recent approach by some of the developed countries has been to explicitly limit the scope
of expropriation through general or specific clauses and some countries have begun to implement
non-precluded measure clauses in an attempt to bolster the pursuit of sustainable development goals.
However,some have gone further and have removed themselves from the ICSID Convention and
others have terminated existed investment treaties47
. As stated in Sornarajah's "A Coming Crises:
Expansionary Trends in Investment Treaty Arbitration", the negative reactions to investment treaties
have fuelled considerable debate on the legitimacy of such clauses preventing legitimate state
practice, intimating that such clauses are in need of an evolutionary reading that restricts their
applicability48
.
According to the International Institute for Sustainable Development, the pursuit of the
Millennium Development Goals is "critical for eradicating poverty, the provision of basic services,
and all other central development concerns", reinforcing the legitimacy of regulatory measures in
pursuit of such sustainable development goals49
. The correlation between socioeconomic development
and environmental sustainability is well recognized in the international agenda. For example, the
preamble to NAFTA includes the resolution by the three members to "undertake each of the preceding
[investment and trade objectives] in a manner consistent with environmental protection and
conservation; preserve their flexibility to safeguard the public welfare; promote sustainable
46 Schill, Stephan. Whither Fragmentation? On the Literature and Sociology of International Investment Law.
European Journal of International Law, Volume 22, Issue 3. (2011) Pp 875-908.
47 Id. In 2007, Boliviawithdrewfrom the ICSID Convention. In 2009, Ecuador denounced the ICSID Convention
to the World Bank.In 2008,Venezuela terminated its BIT with the Netherlands.
48 Sornarajah, M. A Coming Crises: Expansionary Trends in Investment Arbitration. New York, NY: Oxford
Press. (2008) Pp 39-78
49 Almassy, Czunyi, Offerdahl, Pinter. Global Goals and the Environment: Progress and Prospects.International
Institute for Sustainable Development. (2015) Pp. 8

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development; strengthen the development and enforcement of environmental laws and regulations"50
.
This is bolstered by the subsequent side agreement,the North American Agreement on Environmental
Cooperation (NAAEC),which created an assisting institution known as the Commission for
Environmental Cooperation (CEC). Having such objectives provided in the preamble of investment
agreements offers interpretive aid to any potential arbitration proceedings regarding the Parties'
understanding of the relationship between the State, the investor, and the State's police powers.
Regardless, as Metalclad showed, the provisions of NAFTA's Article 1110 on expropriation were still
read expansively to create three categories of expropriation and the Methanex and Pope & Talbot
decisions did not refer to the Preamble as indicative of why the Tribunals decided to revert to a more
restrictive view.
Although Tribunals were viewed as reading investment treaties overly restrictive of state
sovereignty, many States decided to remodel their investment treaties to ensure a higher level of legal
certainty with regards to what constituted an expropriation and whether or not States were free to
legislate in certain fields of the public interest. For instance, the most recent version of the US model-
BIT includes in Article 12 on Investment and Environment that "it is inappropriate to encourage
investment by weakening or reducing the protections afforded in domestic environment law"51
.
Furthermore, in Article 12.5, it is stated that "nothing in this treaty shall be construed to prevent a
party from adopting, maintaining, or enforcing any measure otherwise consistent with this Treaty that
it considers appropriate to ensure that investment activity in its territory is undertaken in a manner
sensitive to environmental concerns"52
. By creating such considerations explicitly within the treaties,
governments can drastically reduce the likelihood of their regulatory measures being interpreted as
indirect expropriation53
. Another example can been seen in the US-Singapore agreement, in which it
states that "economic development, social development, and environmental protection are
independent and mutually reinforcing components of sustainable development", and thus reaffirming
the importance of national policies pursuing such objectives54
. Evidently, the approach to regulatory
measures acknowledges the need for future regulation and reinforces and clarifies the concept of
police powers which allow the host state to enact regulations that could potentially affect foreign
investors.
Outside of North America, many of the developing countries and smaller countries have
explicitly included consideration for environmental measures and have prioritized such regulatory
discretion over the encouragement of foreign investment. The Colombian model-BIT includes an
50 Preamble, North American Free Trade Agreement (NAFTA). (1994)
51 Article 12(2), US model BIT. 2012
52 Article 12(5), US model BIT. 2012
Geneva Institute: Centre for Trade and Economic Integration. 2009. Pp 23
54 Preamble, United States of America-Singapore Free Trade Agreement. 2003

13
article dedicated to the balancing of investment and environmental interests. In Article VIII, the
Colombian BIT states that nothing in the treaty should be construed as to prevent a party from
ensuring any activities in its territory are undertaken in accordance with the environmental law of the
party55
. Another example of a broad provision permitting regulatory discretion is illustrated in the
2007 Norway model-BIT, wherein it provides for a right to regulate, through which "measure
otherwise consistent with [the] agreement that it [the Party] considers appropriate to ensure that
investment activity is undertaken in a manner sensitive to healthy, safety or environmental concerns"
will not be impeded by the agreement56
. Moreover,the derogation from such regulatory measures
appropriate for the protection of domestic health, safety and the environment, in order to encourage
the establishment of foreign investment is expressly prohibited in Article 74 of the Japan-Mexico Free
Trade Agreement57
. Therein, the agreement states that "if a Party considers that the other Party has
offered such an encouragement, it [the Party] may request consultation with the other Party and the
Parties shall consult with a view to avoiding any such encouragement"58
. This ambivalence towards
the intentional "race-to-the-bottom" for the purpose of attracting foreign investment is mirrored in the
Korea-Japan agreement and the Free Trade Area of the Americas draft agreement,illustrating a
complete transition away from the earlier doctrines favoring investment protection as opposed to
regulatory discretion59
.
Furthermore, this process of refining investment treaties with the objective of permitting the
pursuit of international obligations, such as sustainable development goals in the public interest,
expresses the trend towards greater liberalization of regulatory discretion. This attitude reflects more
so the common understanding on the sovereignty of nations within their own territory, an ideology
that had been severely restricted with the advent of expropriation clauses maximizing investor
protection. Along with the western hemisphere's multilateral framework agreement,NAFTA,
representing environmental concerns in its Preamble, the ASEAN Comprehensive Investment Treaty
explicitly provides for a general exception to the definition of expropriation. It states that "non-
discriminatory measures for a Member State that are designed and applied to protect legitimate public
welfare objectives, such as public health, safety and environment, do not constitute an
expropriation"60
.Evidently, there exists a global concern on the exercise by Tribunals of their
significant interpretative powers and the possible negative consequences for domestic policy, which
has resulted in the evolution of investment treaties towards the protection of domestic regulation.
55 Article VIII, Republic of Columbia model BIT. 2007
56Article 12, Kingdom of Norway model BIT. 2007
57 Article 74, Agreement Between Japan and the United Mexican State for the Strengthening of the Economic
Partnership. (2012)
58 Id.
59 Article21, Agreement Between Japan and the Republic of Korea for the Strengthening of the Economic
Partnership. 2002; Article 18(1), Draft on the Free Trade Area of the Americas. 2003
60 Annex 2.4: Expropriation and Compensation, ASEAN Comprehensive Investment Agreement. 1967

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In retrospect,international investment instruments play a significant role in the determination
of the obligations and responsibilities of the investor and the state and in the event of a dispute,
arbitral Tribunals are able to exercise great interpretative powers that have the ability to undermine
legitimate national regulations. With the increasing recognition of environmental protection for the
sake of sustainable development, there has been a backlash at the expansionist ideologies of earlier
doctrines which maximized investor protection at the expense of domestic policy. Thus, Tribunals
and countries have taken it upon themselves to refine the considerations within investment treaties,
allowing for considerations of intent and balancing it with the effect of the measures. As a result,
there has been a growing recognition of legitimate regulatory practices that are non-compensable,
though a significant impact on the investment project is still likely to incur compensation obligation.
Nevertheless,with a growing number of BITs and MITs addressing the legitimate aims of
environmental protection, the doctrine on expropriation may become even more restricted for
purposes of investment protection.

15
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