Indirect Expropriation

This report by the International Institute for Sustainable Development (IISD) examines the legal complexities of 'indirect expropriation' in international investment law. It analyzes how the lack of a clear definition in most investment treaties creates tension between the protection of foreign private investments and the sovereign right of host states to regulate in the public interest, particularly regarding health, environment, and human rights.

• Indirect expropriation occurs when a state takes measures that are detrimental to a foreign private investment, even if the investor formally retains legal title to the property. This is distinguished from direct expropriation, which involves the formal withdrawal of property rights.
• Most of the approximately 2,701 investment treaties worldwide do not provide an explicit definition of indirect expropriation, leaving arbitration tribunals to develop their own criteria. This ambiguity can lead states to avoid taking public interest actions for fear of paying substantial compensation.
• Recent investment treaty practices have attempted to clarify the concept through three methods: reaffirming the state's right to regulate, creating specific exclusions for certain regulations, and providing explanatory annexes with factors for tribunal consideration.
• The 'sole effect doctrine' is a common tribunal approach where only the injurious effect on the investor is considered, disregarding the state's intent or the public interest objective of the measure.
• To qualify as indirect expropriation under the injurious effect criterion, damage must be 'substantial,' 'serious,' or 'severe' and must be 'enduring' or permanent rather than ephemeral.
• Some tribunals apply a proportionality test to balance public and private interests, assessing whether a measure is necessary to achieve a public goal and if the burden on the investor is excessive.
• The 'police power' doctrine suggests that bona fide, non-discriminatory regulations aimed at general welfare (such as public health or environmental protection) are not compensable indirect expropriations.
• The 'state appropriation' criterion, which requires that the state derive an economic benefit from the adverse impact on the investor to justify compensation, is advocated by some but remains marginal in tribunal application.
• The report recommends that states redraft treaties to explicitly define 'police power measures' and establish a hierarchy of criteria to provide more certainty for both states and investors.

APA

Nikièma, S. H. (2012). Indirect Expropriation. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/best_practice_indirect_expropriation.pdf

Chicago

Nikièma, Suzy H. Indirect Expropriation. International Institute for Sustainable Development, 2012. https://www.iisd.org/system/files/publications/best_practice_indirect_expropriation.pdf.

Wikipedia

{{cite report |last1=Nikièma |first1=Suzy H. |title=Indirect Expropriation |publisher=International Institute for Sustainable Development |date=March 2012 |url=https://www.iisd.org/system/files/publications/best_practice_indirect_expropriation.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{nikima2012indirect, author = {Nikièma, Suzy H.}, title = {{Indirect Expropriation}}, institution = {International Institute for Sustainable Development}, year = {2012}, month = mar, url = {https://www.iisd.org/system/files/publications/best_practice_indirect_expropriation.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }