Expropriation clauses in International Investment Agreements and the appropriate room for host States to enact regulations: A practical guide for States and Investors

Executive Summary

 

The reciprocal need for an investor and a host state to establish a viable premise for the protection of investments has been reflected for decades in the evolution of expropriation clauses. This evolution has naturally been aided and abetted by the increasing complexity of the definition of expropriation. It has developed from the mere connotation of a ‘taking’ of property rights by government officials to include advanced and controversial notions regarding the type of investment involved, whether a transfer of property rights is necessary, and the notion of ‘non-compensatory takings’. This evolution is no doubt greatly influenced by the development of jurisprudence in the area of expropriation, creating a plethora of expropriation clauses, ranging from simple and traditional provisions, to more complex clauses, incorporating elements in response to jurisprudential development and lacunae.

 

A particularly recent tendency to further limit the scope of application of expropriation clauses has been to include exceptions within an investment agreement to guarantee that no derogation from the intended level of protection is possible. This has been achieved in several ways through general and specific exceptions to the investment agreement in its totality or to the expropriation clauses. Past practices have included, but are not limited to, extremely precise definition of expropriation, the establishment of a definition of police power-centric regulatory measures, the adoption of specific carve-outs for the expropriation clause, and the limitation of the applicability of the agreement to certain subject matters.

 

Regarding the past and present practice, this memo has concluded that the simplest form of expropriation clause was rarely used by developed countries, which gave preference to expropriation clauses that included “measures tantamount to” and more recently included qualifying criteria to define indirect expropriation. Developing countries, on the other hand, still use simple direct expropriation clause, although it was observed that they also preferred expropriation clause with “measures tantamount to”.

 

With respect to the use of restrictions, almost all International Investment Agreements adopt some type of limitation to the expropriation clause. It was confirmed that the adoption of most complex forms of expropriation clause is directly linked with an increased use of different restrictions in the same agreement.

 

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