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

Matthew C. Porterfield, Georgetown University Law Center

Abstract

State Practice and the (Purported) Obligation under Customary International Law to Provide Compensation for Regulatory Expropriations Abstract (Jan. 12, 2011) The expropriation provisions of international investment agreements (IIAs) – which include both bilateral investment treaties and the investment chapters of free trade agreements – typically require compensation for both direct and “indirect” expropriation. The analysis of whether a regulatory measure results in an indirect expropriation is primarily concerned with the extent to which the measure adversely affects an investment, an approach known as the “sole effects doctrine.” Another provision in IIAs has been interpreted to grant similar (and arguably greater) protection from regulatory measures that adversely affect the value of foreign investment. Many IIAs contain language guaranteeing foreign investors a right to “fair and equitable treatment” as an element of the minimum standard of treatment. This language has been interpreted by tribunals to include a right to a “stable and predictable regulatory environment” that does not frustrate investors’ expectations concerning the profitability or value of their investments. The standards for indirect expropriation and the minimum standard of 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. The issue has received the most attention in the context of the “regulatory takings” debate in the United States, where a relatively narrow right to compensation is recognized, primarily with regard to land use regulations that destroy all or nearly all of the value of real property. Some developed countries similarly recognize a right to compensation for certain measures (again 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.