State Practice and the (Purported) Obligation Under Customary International Law to Provide Compensation for Regulatory Expropriations

Abstract

The expropriation provisions of international investment agreements (IIAs) typically require compensation for both direct and “indirect” expropriation. The analysis of whether a regulatory measure results in an indirect expropriation focuses on the extent to which the measure adversely affects an investment, an approach known as the “sole effect doctrine.” Many IIAs also contain language guaranteeing foreign investors a right to “fair and equitable treatment,” which has been interpreted to grant similar (and arguably greater) protection from regulatory measures that adversely affect the value of foreign investments. The standards for indirect expropriation and fair and equitable treatment under IIAs are widely portrayed as reflecting the relevant standards of protection under customary international law (CIL), which arises out of the general and consistent practice of states based on a perception of legal obligation.

Yet an examination of one obvious source of relevant state practice – the domestic legal standards of protection for property rights that are applicable to both domestic and foreign investors – indicates that that there is no general and consistent practice in this area. Some developed countries recognize a right to compensation for certain measures (principally in the context of land use regulation), but the approaches vary significantly. Developing countries, in contrast, are more likely to categorically reject the concept of regulatory takings. Accordingly, there does not appear to be support in state practice for a CIL right to compensation for regulatory expropriations based upon their adverse effects on the value of investments and without regard to whether the government has actually acquired ownership or control of the asset.