The “Right to Regulate” Doctrine in International Investment Arbitration

To what extent can states regulate in the public interest—be it to protect the environment, safeguard public health, or stabilize their economies—without breaching the rights of foreign investors? And where does this authority intersect with treaty-based protections? These fundamental questions lie at the heart of modern international investment law. This article explores the “Right to Regulate” doctrine, shedding light on the evolving balance between state sovereignty and investor protection through the lens of international investment arbitration.

Definition and Historical Evolution of the “Right to Regulate”

The “Right to Regulate” refers to the inherent authority of states to enact regulations aimed at advancing legitimate

public interest objectives, such as health, safety, and environmental protection. Rooted in the principle of sovereignty, this right was traditionally considered unfettered. However, with the proliferation of international investment agreements (IIAs)—notably bilateral investment treaties (BITs)—beginning in the 1970s, states increasingly subjected themselves to treaty-based constraints, granting foreign investors robust protections.

These protections include fair and equitable treatment (FET), protection against expropriation, and safeguards against discriminatory measures. Over time, these guarantees began to clash with the state’s ability to adapt its regulatory frameworks in response to evolving social and economic needs, thereby prompting calls for a more balanced interpretation of state obligations under international law.

The Importance of Balancing Investor Rights and State Regulatory Powers

Investors typically seek predictability, legal certainty, and stability over the long term. States, however, must retain the flexibility to respond to unforeseen developments or pursue pressing policy reforms. This tension gives rise to the concept of “regulatory chill,” wherein governments may avoid enacting necessary regulations for fear of investor-state disputes.

Modern jurisprudence and treaty-making practices have responded by seeking a more balanced approach—one that neither ignores legitimate investor expectations nor unduly restricts a state’s sovereign functions. The “Right to Regulate” is thus increasingly seen as a vital component of a sustainable international investment framework.

Interpretation of the Doctrine in ICSID and UNCITRAL Arbitration

Arbitral tribunals constituted under ICSID (International Centre for Settlement of Investment Disputes) and UNCITRAL (United Nations Commission on International Trade Law) rules have played a crucial role in shaping the scope of the “Right to Regulate.” Several landmark decisions illustrate this evolution:

In Philip Morris v. Uruguay (ICSID, 2016), Uruguay’s tobacco control regulations were upheld as legitimate public health measures, notwithstanding the investor’s claims of financial harm. The tribunal emphasized that states retain the right to enact non-discriminatory regulations in good faith to protect public welfare.

In Methanex v. United States (UNCITRAL, 2005), the tribunal held that California’s environmental ban on certain fuel additives constituted a legitimate, non-compensable exercise of regulatory power—even though it adversely affected the claimant’s investment.

These cases underscore a growing recognition that investment protections are not absolute and must be interpreted in light of states’ public interest responsibilities.

Use of the Doctrine as a Defensive Tool by States

States have increasingly invoked the “Right to Regulate” as a defense in investment arbitration proceedings. This line of defense is particularly strong when the measures in question pursue legitimate objectives such as public health, environmental sustainability, financial stability, or social justice.

However, not every regulation qualifies under this doctrine. Arbitral tribunals assess whether a measure is discriminatory, arbitrary, disproportionate, or manifestly excessive in its impact on the investor. The legitimacy and necessity of the regulation, as well as its consistency with general principles of international law, remain central to the tribunal’s assessment.

Incorporation of the Doctrine in Modern Treaties: The EU, NAFTA/USMCA, and Beyond

The “Right to Regulate” has gained increasing prominence in contemporary investment treaties and model instruments, with express provisions reinforcing its legitimacy.

European Union agreements, such as the Comprehensive Economic and Trade Agreement (CETA), explicitly affirm the right of states to regulate in pursuit of public policy goals, including health, safety, and the environment.

The transition from NAFTA to USMCA reflects a similar evolution. USMCA includes provisions that limit investor claims to clearly defined standards and affirm the regulatory autonomy of states for “legitimate public welfare objectives.”

Reform efforts under ICSID and UNCITRAL have also emphasized the importance of incorporating language that clarifies and strengthens the “Right to Regulate” within treaty texts and arbitration rules.

Criticisms and Limitations of the Doctrine

Despite its growing acceptance, the “Right to Regulate” doctrine is not without controversy. Critics argue that it may be used to justify arbitrary or discriminatory measures under the guise of public interest, thereby undermining legal certainty for investors.

Moreover, the absence of clear criteria defining the boundaries of legitimate regulation can lead to inconsistent and unpredictable arbitral decisions. This, in turn, may deter foreign investment, particularly in jurisdictions perceived as unstable or prone to policy shifts.

Striking a careful balance is therefore essential. The doctrine must be applied transparently and predictably, ensuring that it serves as a safeguard for public policy without becoming a shield for protectionism or bad faith conduct.

The “Right to Regulate” in Turkey’s BITs

Turkey’s traditional BITs have largely adhered to a classical model focused on investor protection. However, recent treaties—such as those with Singapore and Venezuela—have begun to include explicit references to the “Right to Regulate.”

These newer agreements recognize that states must retain regulatory autonomy to pursue legitimate public policy goals and reflect a shift toward a more balanced treaty model. Turkey’s customs union with the European Union and its alignment with EU norms are likely to further encourage the inclusion of such clauses in future investment agreements.

Conclusion: A Vital but Delicate Balance

The “Right to Regulate” has emerged as a cornerstone of modern investment law, reaffirming the state’s right to pursue legitimate public objectives while still honoring its obligations toward foreign investors. As treaty practice evolves, this doctrine is increasingly codified and clarified, providing greater legal certainty for both states and investors.

However, its success hinges on precise drafting, fair application, and judicial consistency. The future of international investment law depends on maintaining this delicate equilibrium—ensuring that sovereign states can govern effectively without eroding investor confidence.

Summary: Key Takeaways on the “Right to Regulate” Doctrine

The “Right to Regulate” refers to the sovereign power of states to enact regulations in the public interest, particularly in areas such as health, safety, and the environment. It plays a vital role in balancing investor protection with public policy needs, especially in light of evolving global challenges.

Investment tribunals have gradually acknowledged the legitimacy of this doctrine, notably through landmark decisions rendered under ICSID and UNCITRAL. Modern treaties, including CETA and USMCA, now incorporate explicit clauses affirming states’ regulatory autonomy.

Despite its strengths, the doctrine faces criticism over potential misuse, ambiguity, and its chilling effect on investment. Therefore, it must be implemented within a transparent and well-defined legal framework.

Turkey’s recent BITs show a clear move toward recognizing regulatory sovereignty, reflecting broader international trends. As the legal landscape evolves, this doctrine is likely to remain central to discussions on the future of global investment governance.