Indirect Expropriation

The document analyzes the tension between protecting foreign investments and the sovereign right of states to regulate for the public interest. It examines how the lack of a clear definition of 'indirect expropriation' in most investment treaties allows arbitration tribunals to apply varying criteria—such as the 'sole effect doctrine' or proportionality—which can lead to substantial compensation claims even for legitimate public health or environmental regulations.

• Most international investment treaties lack an explicit definition of indirect expropriation, leaving arbitration tribunals to develop their own criteria, which creates uncertainty for host states regarding their regulatory space.
• The 'sole effect doctrine' is a common tribunal approach where only the injurious impact on the investor is considered, disregarding the state's intent or the public interest purpose of the measure.
• To qualify as indirect expropriation under most tribunal standards, a measure must cause damage that is both substantial—rendering the investment economically useless—and irreversible or enduring.
• Some tribunals apply a proportionality test to balance the public interest against the sacrifice imposed on the private investor, though this is often a complementary criterion to the injurious effect test.
• The 'police power' doctrine suggests that non-discriminatory, bona fide regulations for the general welfare are not compensable expropriations, although its application is inconsistent across tribunals.
• Recent investment treaties, such as those from COMESA and ASEAN, have introduced more effective 'carve-outs' or exclusions that explicitly state that certain public welfare measures do not constitute indirect expropriation.
• The 'state appropriation' criterion, which requires the state to derive an economic benefit from the measure for it to be an expropriation, is rarely applied by tribunals and is generally rejected by academics.
• Host states, particularly developing countries, face a financial risk where public interest regulations may trigger compensation requirements they cannot afford, potentially leading to 'regulatory chill'.

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} }