The Right to Regulate: The Interface of State Sovereignty and Foreign Investor Rights in Investment Arbitration

The Right to Regulate: The Interface of State Sovereignty and Foreign Investor Rights in Investment Arbitration



Abstract

The conflict between state sovereignty and the rights of foreign investors in areas such as human rights, the environment, water law, public health, and security constitutes a highly contentious issue in international investment arbitration. The state's right to regulate is often construed in investment arbitration as an embodiment of sovereign power, perceived as a potential threat to the stability and predictability of the international investment regime. This tension often results in a focus on the political and legal risks associated with regulatory measures, at the expense of acknowledging the fundamental role of the right to regulate as an essential safeguard for public interests. Although regulatory measures are rooted in sovereign rights and aimed at protecting public interests, they have nonetheless frequently prompted investment claims against states. An examination of arbitral awards reveals a shifting paradigm, with tribunals increasingly applying criteria such as considering public purpose, proportionality, and non-discrimination—to evaluate the legitimacy of regulatory interventions more holistically. This evolving approach challenges the notion of an inherent conflict between sovereignty and investor rights. The study argues that contemporary legal frameworks—particularly those embedded in modern international investment treaties—and a nuanced interpretation of international legal principles can foster a constructive coexistence of investor protections and states’ regulatory autonomy.



Keywords: right to regulate, international investment arbitration, state sovereignty, investor protections, international investment law.