Drawing the Line between Non-compensable Regulatory Powers and Indirect Expropriation of Foreign Investment

Investment tribunals and scholars alike have been struggling to identify reliable criteria to distinguish the exercise of regulatory powers from indirect expropriation. The distinction is crucial, as only indirect expropriation requires compensation. The paper adopts a law and economics approach with a view to drawing a better line between the exercise of regulatory powers and indirect expropriation. It takes advantage of the experience gained in dealing with eminent domain in United States jurisprudence, in assessing investment projects and in evaluating at the national and international level the impact of regulatory measures may be expected to have. The paper then attempts to demonstrate that considerations of efficiency should guide and assist – but not necessarily bind – arbitrators in the delicate operation of determining whether the line between exercise of regulatory powers and indirect expropriation has been crossed, thus triggering the obligation to compensate. It finally argues that an economic approach to the question of indirect expropriation would have not only beneficial effects on the settlement of investment-related disputes, but also a positive impact on the conduct of both the foreign investor and the host State.