Protection against Indirect Expropriation under National and International Legal Systems

• Main Authors: Max Gutbrod, Steffen Hindelang, Yun-I Kim
• Format: Article
• Language: English
• Published: Goettingen Journal of International Law e.V. 2009-04-01
• Series: Göttingen Journal of International Law
• Online Access: http://gojil.uni-goettingen.de/ojs/index.php/gojil/article/view/38

<p align="justify">In recent years, direct expropriation<sup><sup>2</sup></sup> has rarely been seen.<sup><sup>3</sup></sup> States which wish to import capital do not like to be associated with posing a permanent, non-calculable threat to foreign-owned property but prefer to present themselves as jurisdictions with very stable, reliable and orderly regulatory environments.<sup><sup>4</sup></sup> Expropriation, however, has by no means vanished; its execution has just become more subtle.<sup><sup>5</sup></sup> Ambiguously or generously worded laws are ‘interpreted’ in a way that suits certain groups in the government or are only enforced when it suits a particular interest; administrative discretion is influenced by factors unrelated to the matter at issue, or administrations fail to conduct their processes in a transparent and comprehensible way. All these measures, turned against a foreign investor, can easily drive him out of business. Virtually all bilateral investment treaties (BITs) and multilateral investment agreements (MITs), therefore, reflect this development and also cover acts of State which may expropriate “indirectly through measures tantamount to expropriation or nationalisation”<sup><sup>6</sup></sup> (indirect expropriation<sup><sup>7</sup></sup>). Moreover, many international investment agreements (IIAs) not only provide rules on (indirect) expropriation but also establish so-called treatment standards “which refer to the legal regime that applies to investments once they have been admitted by the host State.”<sup><sup>8</sup></sup> Administrative malfeasance, misfeasance and nonfeasance may also affect the investment adversely without amounting to “indirect expropriation”, constituting a less intense interference with the property. Indeed, there are arbitral awards which, while not accepting a claim based on “indirect expropriation”, established a compensable violation of “treatment standards”, i.e. in particular the “fair and equitable treatment” embodied in BITs or MITs.<sup><sup>9</sup></sup></p><p align="justify">This article will look at six typically posed challenges to foreign investment posed by administrative acts, focusing on the issues of discrimination, <em>mala fide</em> and lack of transparency, and will discuss the response of national and international rules applicable to the situation of indirect expropriation.<sup><sup>10</sup></sup> These scenarios are based on Russian legal regulations<sup><sup>11</sup></sup> and are inspired by the events in the Commonwealth of Independent States reality but by no means intend to be a reflection of facts.</p><p align="justify">We will show that the internal legal order cannot respond to any of these challenges through striking a just balance between legitimate business interests of the foreign investor and the State’s sovereign right to regulate. Rather, it is the international (contractual) law on foreign investment which offers the clearly more sophisticated framework for a balanced settlement of a foreign investment dispute. Our prediction is that if economies in transition, like Russia, do not start living up to the standards required by international investment agreements quickly, they might face the risk of the marginalization of their national legal orders in the settlement of foreign investment disputes. Such conflicts, which earlier clearly had an “internal component”, would increasingly become international only and would, in this sense, be externalized.</p><p align="justify">This article will start off by providing a brief survey of the present discussion in the literature based on the awards rendered on the subject, on what constitutes a compensable taking in international law (Section A.). It will then turn to certain hypothetical situations (Section B.). These are split into two parts: the first four scenarios deal with State measures which are lawful by national standards (Section B.I.) and the last two scenarios focus on State measures which are unlawful even by national standards (Section B.II.). Finally, it summarizes and evaluates our findings.</p>