Compensation for Indirect Expropriation in International Investment Agreements: Implications of National Treatment and Rights to Invest

Abstract

International investment agreements allow investors to bring compensation claims when their investments are hurt by new regulations. This requirement that host governments compensate for indirect expropriation helps solve post-investment moral hazard problems such as holdups , thereby helping to prevent inefficient over-regulation and encouraging foreign investment. However, when the social or environmental harm of a project is uncertain pre-investment, compensation requirements can interact with National Treatment clauses in a manner that reduces host government welfare and makes them less likely to admit investment. A police powers carveout from the definition of compensable expropriation can be Pareto-improving and increase foreign investment.

Regulatory chill and the effect of investor state dispute settlements

“…The paper contributes to different types of literature. The paper is closely related to the work by Aisbett, Karp, and McAusland (2010a, 2010b), who analyze how changes in the legal extent to which a government does not have to pay compensation in the case of regulation (police power carve out, PPCO) affects investment decisions of firms and regulation. In Aisbett et al.…”

“…Aisbett et al. (2010b) study in the context of international tribunals based on investment treaties the effect of extending PPCO in an environment where governments are bound by national treatment clauses. The tribunal checks whether a complaint by a firm against regulation without compensation falls within the scope of PPCO.…”

“…The parameter 1− q can be interpreted as a measure of “carve out,” the extent to which there are situations in which the firm does not have to be compensated when facing harmful regulation, while q is a measure of the protection of the firm (see Aisbett et al. [2010a, 2010b] for their modeling of carve outs). If q = 1 or q = 0, the law is clear cut and the firm is always or never to be compensated when regulation takes place.…”

Investment Claims Against Asian States -- A Legal Analysis of the Statistics, Trends and Prospects

“…In this connection, the current paper does not detail these provisions (which are well known) but it simply refers to available publications. The following nine topics are classic issues of investment law: (1) definitions and scope of application; 15 (2) investment promotion and conditions for the entry of foreign investments and investors; 16 (3) general standards for the treatment of foreign investors and investments; 17 (4) issues of monetary transfers; 18 (5) expropriation (direct or indirect); 19 (6) operational and other conditions; 20 (7) losses from armed conflict or internal disorder; 21 (8) treaty exceptions, modifications, and terminations; 22 and (9) dispute settlement. 23 These diverse provisions are important to reassure foreign investors that they will be able to reap the benefits of their investment, and no trend denies such an approach, although evidence on the extent to which investment decisions are influenced by investment treaties is mixed.…”

The economics of investor protection: ISDS versus national treatment

“…Existing and proposed ISDS mechanisms follow procedures separate from the host country's legal system, mostly relying on ad hoc panels that decide on monetary compensations of foreign investors for increases in costs, or reductions in revenues, that are caused by "unjustified" government regulation. 1 According to UNCTAD, known treaty-based arbitrations amount to 942 cases of which 602 have been concluded. Of the concluded cases, 35.7 % were won by states, 28.7 % were won by investors, and the remainder was either settled, discontinued or decided in favor of neither party.…”