Application of the Principle of Proportionality as a Tool for Investment Dispute Settlement

Abstract

Generally, foreign investment contracts are concluded mainly as long-term cross-border investments. As a result, unexpected non commercial risks, politically or legally, may arise during the period of its duration. To evade this fear, many bilateral and multilateral WUHDWLHV DUH FRQFOXGHG ZLWK SURYLVLRQV RQ ³QR´ H[SURSULDWLRQ ZLWKRXW FRPSHQVDWLRQ DQG settlement through arbitration. This is because, nationalization or expropriation (directly or indirectly) of foreign property is the foremost governmental interference and it is considered as one of the most serious encroachments on property rights of foreign investor. Numerous tribunals and scholars have accepted that the host states could enjoy their sovereign rights in order to enhance socio-economic conditions, protect the environment and protect essential interest of the State during a state of emergency/economic crisis through adopting various regulatory measures. At the same time, host states are under compulsion to fulfil their contractual commitments which were given at the entry of investment. This situation makes it difficult for arbitrators to come to a conclusion whether regulatory measures tantamount to expropriation which prevent the use and enjoyment of the LQYHVWRUV¶SURSHUW\ ULJKWV In this regard, in order to come to a preferable solution, arbitrators try to apply the principle of proportionality as a method of investment dispute settlement particularly in expropriation cases. Thus, this principle has emerged as a tool in balancing different conflicts of interest in many legal orders and systems. Recently, ICSID arbitrators who seem to be attracted by the application of principle of proportionality have cited European Courts of Human Right (ECHR) and its case laws, and World Trade Organization (WTO) Jurisprudence. This principle has been 167 applied by ICSID tribunals after the Tecmed v. The United Mexican State award and subsequent arbitral awards such as CMS v Argentina(2005), LG&E v Argentina(2006), Sampra v Argentina (2007), Continental Casualty v Argentina (2008). Further, the application of proportionality is considered as a desired method of resolving two different conflicts of interest. However, it is questionable how far the above perspectives have been taken into account effectively through the application of principle of proportionality. At the same time the principle of proportionality becomes important as it has treaty status and it is not a mere principle like others