Police powers, indirect expropriation in international investment law, and article 31(3)(c) of the VCLT: A critique of Philip Morris v. Uruguay

Abstract

Given the global contestation against BITs and ISDS, the outcome of the Philip Morris v. Uruguay case upholding Uruguay's right to regulate for public health is important for the international investment law community. However, it is not just the outcome of a case but also the quality of legal reasoning that is significant in building the legitimacy of the ISDS system. This paper focuses on the reasoning adopted by the tribunal in deciding whether Uruguay's regulatory measures resulted in the expropriation of Philip Morris's investment. The paper critiques the tribunal's use of Article 31(3)(c) of the Vienna Convention on the Law of Treaties to invoke the police powers rule in interpreting the expropriation provision of the Switzerland-Uruguay BIT. The tribunal's reasoning was internally inconsistent and based on abuse of arbitral precedents. Clarity in legal reasoning by ISDS tribunals is imperative to boost the legitimacy of the ISDS system for all stakeholders.