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Docteur Ana Maria Daza-Clark

Lecturer in International Law - École de droit - Université d'Édimbourg

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Regulatory Expropriation

I. Definition

1.

Regulatory expropriation is a subcategory of indirect expropriation, not defined as such in investment treaties. It occurs “when host States invoke their legislative and regulatory powers to enact measures that reduce the benefits investors derive from their investments but without actually changing or cancelling investors’ legal title to their assets or diminishing their control over them.”1 

II. Treaty practice

2.

Virtually all investment treaties include a distinction between direct and indirect expropriation, with expressions such as “or equivalent measures”, “or measures with similar/equivalent effects”, “or measures tantamount to”.2 However, these references were insufficient to ascertain whether a regulatory (indirect) expropriation had in fact taken place. 

3.

In early 2000s investment treaties introduced definitions of indirect expropriation, as well as carve-outs and explanatory notes, exempting certain regulatory measures from its scope.3 The definition cover measures having an effect equivalent to direct expropriation, which substantially deprive the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment, without formal transfer of title or outright seizure.4

III. Difference between direct and indirect expropriation

4.

In the case of indirect expropriation States do not expressly remove or shift investor’s legal title over the investment. However, like direct expropriation regulatory (indirect) expropriation is prohibited in virtually all investment agreements, unless adopted for public purpose, in a non-discriminatory manner, following due process, and against payment of compensation for the value of the property.

IV. Scope and extent

5.

Regulatory measures fall within the scope of regulation of expropriation provisions, as such their effects and characteristics ought to be assessed by tribunals.5 Measures potentially expropriatory range from the ban or handling of certain hazardous materials,6 cancellation of licences and permits;7 interference with contractual rights (in the exercise of governmental capacity);8 re-zoning of areas originally granted to develop the investment project;9 taxation measures;10 etc.

6.

Often States implement such regulations to protect or promote public welfare objectives. This situation begs the question where the line between non-compensable legitimate regulation and compensable indirect expropriation lies.11 In finding these contours, investment tribunals have adopted a case-by-case factual approach.12

7.

The central question concerns the level of economic deprivation as a preliminary step.13 Additional elements of analysis relate to whether the deprivation is permanent;14 and whether other rights of ownership e.g. control were affected.15 

8.

Tribunals have also questioned whether the regulatory measure is “disproportionate to the need being addressed”.16 Or whether the State undertook specific commitments.17 

V. State's right to regulate: Effect or purpose

9.

An effects-only approach to ascertain regulatory expropriation no longer finds support in international investment law. Newer investment treaties contemplate three factors to determine if a regulatory measure equates an expropriation:

  1. Economic impact: Considers the level of economic deprivation over the investment. Importantly, this aspect standing alone does not establish that an expropriation has occurred.18 In this connection, tribunals consider also whether the investor remains in control of the investment,19 and if the measure is permanent.20 Appropriation of the investment by the State is a criterion which is less favoured among tribunals.21 22
  2. Legitimate expectations: Considers the extent to which the government interferes with previous commitments, undertakings or representations offered to the investor.23
  3. Character: Considers the purpose of the measure, and whether it is proportional to its objectives.24 

10.

Consideration of these factors can still lead tribunals to conclude that a regulation has crossed the line and constitutes compensable expropriation.25

VI. The Police Power: A carve-out from expropriation provisions

11.

States’ rights to regulate over specific public welfare objectives such as the environment, public health and safety is expressly carved-out from the provisions on expropriation. In other words, except in rare circumstances (e.g. lack of proportionality), non-discriminatory regulatory measures applied to protect legitimate objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.26 This doctrine has been identified as a rule of customary international law, relevant in the interpretation of expropriation provisions included in older generations of investment agreements.27

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