International Investment Law and the Right to Regulate: Treaty Design, Arbitral Interpretation and ISDS Reform

Abstract

This paper considers the ability of international investment law to protect foreign investors, while preserving the regulatory sovereignty of host States in pursuit of public objectives. It posits that the balance is generated through the interaction of three levels: the substantive treaty text, the interpretive practices of tribunals, and the procedural and remedial architecture through which claims are decided and valued. The analysis concentrates on fair and equitable treatment (FET), indirect expropriation and the police-powers doctrine, with special focus on legitimate expectations, regulatory change, public-interest objectives and taxation. It then explores recent treaty practice in Canada, Australia, India and the United Kingdom, with Pakistan examined as a significant resource-dispute and treaty-reform case study. It also reviews the work of the UNCITRAL Working Group III on procedural and cross-cutting provisions, damages and compensation and standing mechanisms in 2025–2026. The key finding is that there is no single right to regulate clause that can solve the dilemma between investment protection and regulatory autonomy. More precise FET provisions, expropriation annexes, carefully drafted exceptions, tax filters, treaty-party interpretations and procedural safeguards can reduce interpretive uncertainty. Their effectiveness depends, however, on the applicable treaty, and on the interaction between liability and quantum. The article thus proposes a layered drafting approach: narrowly define substantive obligations to preserve legitimate regulatory change, preserve meaningful protection against discrimination and denial of justice, and align ISDS and damages rules with the substantive allocation of risk. This comparative evidence suggests divergence, not convergence, and renders treaty-specific analysis indispensable.