Regulations and Indirect Expropriation: Major criteria for deciding indirect expropriations in investment treaty arbitration

This paper examines the current jurisprudence of expropriation in investment treaty arbitration. For investors, the expropriation of local companies or factories in foreign countries is the biggest of all foreseen risks, but expropriation itself is not illegal under international law, and is illegal only when it does not satisfy certain conditions. Currently, most investment treaties provide explicit conditions, namely that the measures (1) are done for a public purpose, (2) are not discriminatory, (3) are taken under due process of law, and (4) are accompanied by payment of compensation. Today, the issues frequently disputed in investment treaty arbitration are not whether or not government actions satisfy these four requirements, but whether or not those government acts (regulations, etc.) could be regarded as "expropriation." Once an act is deemed as expropriation, the government must pay the investors compensation at the level stipulated in the investment treaties. This has become especially controversial when these acts (regulations, etc.) are not aimed directly at acquiring the assets of investors, but have other objectives such as environmental protection. Recognizing the widest possible range of invasive government regulations as expropriation would protect investment more broadly. On the other hand, the expansion of the scope of acts for which payment of compensation is obligatory would lead to a marked increase in the cost of government regulations. This issue of how to achieve a balance between protecting investment and maintaining a degree of freedom in the implementation of government regulations has been debated on many occasions, but a clear concept that will guide arbitral tribunals has not yet been identified.



This paper examines the way in which arbitral tribunals approach this issue, and makes the following observations. In order to be deemed expropriation, there needs to be a "substantial degree" of interference of property rights. In many cases disputing whether or not regulations should have been regarded as expropriation, expropriation was not found on the grounds that this requirement had not been met. In some cases where certain regulations have caused serious impairment of investment, tribunals have denied the finding of expropriation. This paper shows two approaches to making such judgments. In addition, in judging whether interference has amounted to "substantial degree" or not, the following points are of importance: whether control and management of the investment remain in the hands of the investors, the extent to which rights and interests are recognized as being important, and how the entirety of the impaired investment is delineated.