Subject of the master’s thesis is the analysis of protection from illegal expropriation; which seeks the balance between rights of foreign investors and rights of host states, and forms the core of international investment law. To answer a question how to draw a line between measures adopted by the host states that constitute expropriation of a foreign investment and measures that are legitimate regulation, the tribunals in international investment arbitration adopted two doctrines; the sole-effects doctrine and the police powers doctrine. The sole-effects doctrine states that the only factor in establishing whether an indirect expropriation occurred is the effect of the state measures on the affected property. Purpose of these measures is irrelevant in this determination. On the other hand, the doctrine of police powers considers as relevant criteria the purpose, context and nature of the contested measures. If the measure pursues legitimate public welfare objectives, is non-discriminatory, adopted in good faith and is reasonable, then there was no expropriation. Due to the shortcomings of both doctrines, a mitigated police powers doctrine has been developed, which limits it to some most relevant aspects of public welfare, such as; public health, safety, environment and tax measures. The doctrine in its mitigated form has been included in several new international investment treaties. The master thesis also touches upon the increasing practice of arbitral tribunals to use the test of proportionality in adjudication of legality of the exercise of police powers. The hypothesis of this master’s thesis is that when adjudicating a claim for an alleged indirect expropriation the purpose of the measure must be considered and that the doctrine of police powers is limited to certain measures that pertain to most relevant public welfare objectives.
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