Assisting States in drafting better investment agreements

15 October 2012

A new UNCTAD publication, the sequel to the 1999 Pink Series paper on expropriation, analyses expropriation provisions in international investment agreements (IIAs) and their interpretation by arbitral tribunals. Moving beyond a merely descriptive role, the paper offers policy options to assist States in drafting IIA clauses that help to promote sustainable development.

Expropriation provisions protect foreign investors and investments against arbitrary or uncompensated dispossession of their property. An overwhelming majority of IIAs allow States to expropriate investments as long as the taking is effected for a public purpose, in a non-discriminatory manner, under due process of law, and against the payment of compensation. A number of recent arbitral decisions have discussed these conditions, helping to further flesh out their meaning.

In recent years, increasing concern about undue constraints on the State's prerogative to regulate in the public interest has brought to the fore questions regarding indirect expropriation. These questions concern the appropriate criteria for determining whether an indirect taking has occurred, and for distinguishing indirect expropriation from a legitimate regulation which is non-compensable despite the economic impact on particular investments.

Against this background, and at both the treaty and arbitral practice level, UNCTAD's sequel to the 1999 Pink Series paper on expropriation addresses (a) the categories of expropriation; (b) requisite elements and conditions for its lawfulness; (c) how to establish an indirect expropriation and to distinguish it from non-compensable regulation; and (d) questions regarding the calculation of compensation.

In its last section, the paper offers a range of policy options for negotiators, which range from the "high-protection model" (i.e. the granting of full and unfettered protection to foreign investors), to the "qualified or increased predictability model" (i.e. clarifications of the criteria, approaches and methodology used to assess an alleged expropriatory measure).

The paper concludes that criteria need to be established in order to distinguish between the legitimate right of States to regulate in the public interest, and the legitimate right of investors to have their property rights duly protected under international law against expropriation. In this regard, the qualified model takes better account of the State's right and need to maintain sufficient policy space to regulate in the public interest, and to minimize risks arising from an overly broad expropriation provision, and is thus better suited to the interests of sustainable development.

This sequel is complementary to and in line with UNCTAD's Investment Policy Framework for Sustainable Development, which pulls together UNCTAD's cumulative expertise on national and international investment policymaking to make investment work for sustainable development and inclusive growth.