9 - The Boundaries of Regulatory Expropriation in International Law

Abstract

International tribunals have repeatedly invoked substantial deprivation as the litmus test for expropriation under international law. International expropriation cases, however, can be more accurately classified in three ways: (i) direct or indirect appropriations; (ii) arbitrary deprivations that cannot be justified by the exercise of state police powers to protect public order or morals, human health or the environment; or (iii) cases where the state has abrogated a previously granted permission and the investor is deprived of its investment. Regulatory expropriation questions cannot be adequately addressed without a thorough examination of compensation policy. Cases of regulatory expropriation involve conflicting policies and interests which are not easily, if at all, reconcilable. While the explicit incorporation of US regulatory takings analysis into new investment treaties provides useful guidance to tribunals, this new wave approach does not solve the underlying tension between investment protection and the exercise of police power regulation. The policy rationale for expropriation protection cannot rest on a general principle of protection against wealth deprivation. Many regulations result in some form of wealth deprivation. Police power regulation allows for wealth deprivations when the state determines drastic action is required to protect the populace. Instead, there are two primary rationales for the protection against expropriation. The first is to provide a remedy where the state directly or indirectly acquires a foreign investor's property. This protects against unjust enrichment and ensures that where there is a public benefit the burden of obtaining that benefit is born by the general public. The second rationale is to ensure that state measures do not deprive investors of their investments unless the measure is reasonably necessary to protect an essential public interest recognized under the narrow police powers exception. International expropriation law provides a minimum standard of protection. Its role is not to achieve a welfare-maximizing optimal balance in the protection of foreign investment(s). Rather, its purpose is to provide a minimum level of protection from state appropriations and arbitrary conduct. If foreign investors want protection beyond that minimum level, they should use appropriate risk allocation mechanisms such as insurance, contract and diversification.