Expropriation of Investment Under International Law


The right to expropriate is an undisputed right of sovereign States. Expropriation is legal per se under international law. In principle, it has always been beyond doubt that a State has the power and the right to expropriate the property of nationals and foreigners. But a legal expropriation of property owned by foreigners is subject to certain conditions. These conditions are commonly attributed to as a public interest, absence of discrimination, due process of law and compensation that is prompt, adequate and effective.

Expropriation provisions in International Investment Agreements (IIA) refer to the expropriation of “investments”. This right is, however, conditioned by principles of international law as well as by domestic law in most States, in the sense that the taking must be for a public purpose, on a nondiscriminatory basis, under due process of law and upon payment of compensation. In the pre-IIA era when direct expropriations prevailed, the international debate focused on the amount of compensation to be paid under general international law. The proliferation of IIAs, each providing a specific standard of compensation, has largely put an end to this discussion. In recent times, the notion of indirect expropriation came to the fore due the regulatory activism of the modern State.


Today States often intervene in economic affairs in the interests of general welfare, security, safety, environmental and other public-interest objectives. International law is clear on two points:

  • First, States have a legitimate right to expropriate foreign property as long as the requirements of legality are met.
  • Second, States have a legitimate right to regulate in the public interest without paying any kind of compensation.

The clash occurs when regulation leads to a total or near-total destruction of an investment. Expropriation and regulation are different in nature. The former focuses on the taking of an investment; it is a targeted act. The latter is part of the common and normal functioning of the State where impairment to an investment can be a side effect. Expropriation is always compensable, whereas regulation is not. Drawing a line between the two is not easy but is of paramount importance:

The international rules on expropriation should not diminish or alter in any degree the ability of States to regulate in the public interest. At the same time, regulation must not be used as a disguised mechanism to expropriate foreign property. 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.

A factual inquiry, necessarily done on a case-by-case basis, can be grounded in a common conceptual framework. Various sources, including State practice, jurisprudence and doctrine, show that an assessment of indirect expropriation requires a minimum of three relevant factors, namely (a) the degree of interference or economic impact of the measure, (b) the interference with legitimate investment-backed expectations of the investor and (c) the nature, purpose and character of such measure.


What is presently in dispute is not the question whether an expropriation requires compensation but whether a particular interference is to be contemplated an expropriation. This is especially true in the field of regulatory interference. Formal expropriations and their characteristics remain undisputed as a concept. The concept of indirect expropriation as such is approved in the case law. But distinct approaches are used by arbitral tribunals to establish whether an indirect expropriation has taken place. There is also a certain tendency in model BITs and investment protection treaties to limit the concept of indirect expropriation.

Analysing a measure in the light of these three relevant factors will assist in identifying whether the measure is a targeted or irregular act, which would constitute an expropriation or a normal or common regulation aimed at the general welfare. Indicators of the irregularity of an alleged legitimate regulatory act include discrimination, violation of due process, lack of genuine public purpose, lack of fair and equitable treatment, manifest disproportionality of the measure, abuse of rights and transfer of benefit to the State.


No particular principle should be conclusive or used in isolation; together they serve as elements of a global assessment that must be made to determine whether a measure is expropriatory or not. Other critical issues include clarifying the range of interests capable of being expropriated as well as the various approaches regarding compensation and reparation. In general, States have a number of policy options at their disposal in order to address specific concerns, minimize risks and achieve desired policy objectives. When making relevant choices, it is crucial to keep in mind that an expropriation provision should not undermine or weaken the right of States to exercise their police powers and regulatory functions.

This Article written by Nancy Patel, Student of Institute of Law, Nirma University.

Also Read: Investor – State Dispute Under International Investment Law

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