Indirect Expropriation in International Investment Agreements and Sovereignity

In contrast to direct expropriation, which is forced a transfer of property from an investor to the state, indirect expropriation is quite complex to determine, because it can vary. Generally, it refers to the state actions, which are affecting investor capability to use or to gain profit from the investment. This has a similar effect of taking the property, and, moreover, the state actions must be done to serve public interests. The unclarity of a definition on Indirect expropriation provisions in Bilateral Investment Treaties and other investment treaties are discussed for a long time and the type of state actions that could be considered as an indirect expropriation are continuously debated.

In result of the inability to clearly define indirect expropriation in treaties, tribunals are distinguishing between normal state policies and indirect expropriation, which consequently qualifies for compensation.

Many legal instruments, such as new Bilateral Investment Treaties, International Investment Agreements and emerging Trans Pacific Partnership Agreements, are being developed in accordance with customary international law standards mainly to improve the clarity of treaty texts and the consistency of legal interpretation in many areas, including indirect expropriation provisions. However, arguably the recent international agreements still have vagueness in the text, which could result in arbitral interpretations, which consequently could conflict with the intent of the parties.

Latest developments in this area have shown that the powers of states to limit rights over property have been recognised. Most importantly, the state power to control property, historically, has been described as an exercise of ‘police power’ (from US constitutional law: ‘police power’ is the capacity of the states to regulate behaviour and enforce order within their territory for the betterment of the health, safety, morals and general welfare of their inhabitants) to promote legitimate public purposes in society.

However, as states evolve politically and economically, the protection of property rights are becoming more and more principal mode to repress abusive uses of state power. Nevertheless, since property rights are not absolute, and must serve a determinate social function, they are unfortunately subject to limitations.

Therefore, state authorities can legally exercise their powers to control private property within the boundaries of permissible legislative or bureaucratic discretion. However, the behaviour exceeding such boundaries requires the state to compensate the harm suffered by investors because of sued regulatory interferences.

International investment agreements with indirect expropriation provisions in their vagueness of definition in various ways would and are affecting state sovereignty, as they are in their principal limiting the state freedom to regulate, and, nevertheless, tribunals are continuing interpreting these provisions from case to case and the states are continuing to develop texts, which eventually altogether should lead to more consistent and unite approach in this area.

Thak you.