Analysis And Reflections On The Institution Of Indirect Expropriation Of International Investment

Since the 1990s, under the NAFTA and ICSID investment dispute settlement mechanisms, foreign investors frequently claim against host states for the governments'measurs for the protection of the environment, public health, economic adjustment,which is a serious threat to the host states'ability to safeguard the public interest. These governments'measurs are alleged to constitute indirect expropriation by foreign investors.That makes people take seriously the significant imbalance between the investors private rights and host states'sovereign authority.However, the relevant provisions of international investment agreements are grossly inadequate, and the indirect expropriation arbitration practice has many problems. Therefore, people seek to reform and improve the rules of indirect expropriation, the issue of indirect expropriation has become the new hot spot of the theory and practice of international investment law.The first chapter of the thesis analyses the definition of indirect expropriation and the reasons for the increase in disputes about indirect expropriation.Treaty drafts,such as The Proposed Convention to Protect Private Foreign Investment,international investment agreements(IIAs)and the practices for international investment dispute settlement have been long on the trial of definition and connotation of indirect expropriation. However, the complexity of indirect expropriation and the complicated conflicts of interests between the investors and host countries as well as the developed and developing countries make it difficult to produce a unified and accurate definition. Definitely, certain common perspective has been reached to some point, that is, indirect expropriation refers to the government measures with the effect equivalent to direct expropriation without formal transfer of title or outright seizure. The reasons for the indirect expropriation to be the hot spot are categorized as follows:(1)States make comprehensive use of direct foreign investments actively and seldom expropriate directly;(2) States adjust their economic structure and transform their development modes, which lead to the increase in indirect expropriation;(3) States need to regulate foreign investment in order to exercise national functions and make the regulation more complicated.(4) States enhance the protection for the public interests such as the environment, human health and security;(5)The weaknesses of international investment laws,such as the broad definition of investment, the ambiguous definition of indirect expropriation, aggravates the issue of indirect expropriation.The second chapter of the thesis expounds the form and object of indirect expropriation. It is necessary to understand the form and object of indirect expropriation in order to gain the more thorough and full-scale comprehension. The issues of indirect expropriation are presented in many forms with the typical examples classified as follows: involuntary alienation of property, interference with investment and business operation, cancel license or permission, overtaxation or arbitrary taxation, illegal deportation of foreign investors, complete prohibition of the transfer or control of property, substantial interference with the management and control of enterprise,. The object of indirect expropriation refers to what property can be indirectly expropriated, which includs tangible property and intangible property in accordance with the provisions of IIAs and indirect expropriation arbitration practices. Nevertheless,not all of intangible property can be indirectly expropriated.Indirect expropriation not only contains the expropriation on ownership control, but on the management and control of foreign enterprise. In certain cases,the technique of"conceptual severance", whereby a part of the"bundle of property rights"that is directly affected by a measure is severed and construed to be separate whole right,has been adopted on the decision of expropriation object. The tribunal's approach may consider every kind of"property right"and"property interest"a kind of"investment, which could result in the improper magnification of indirect expropriation scope. Consequently, we should adopt"parcel as a whole"theory to determine the object of indirect expropriation, and strictly limit it in the scope of"investment"of IIAs.The third chapter of the thesis illuminates the criteria and method to determine whether a government measure constitutes indirect expropriation. How to determine whether a government measure constitutes indirect expropriation is the most controversial issue in relevant arbitration practices and theoretical disputes, which has thoroughly and vividly represented the conflicts of interests between investors and the state, the developing countries and developed countries as well as the economic value and non-economic value. In accordance with the summaries and categorization of the arbitration practices, the criteria for determine whether a government measure constitutes indirect expropriation are generally confirmed as follows:(1)the influence of government measure on investment;(2)the context, characteristics and purpose of government measure;(3) the extent to which the government measure interferes with distinct, reasonable investment-backed expectations. The third criterion is generally adopted by the arbitration practice. In the case of the first two criteria, some cases adopted the former, which was"sole effect method", while certain adopted both standards, which was called"effect and nature method"."Sole effect method"focuses upon the interests of and the harm done to the investor. Adopting the method may make it easy to ignore the host state's interests. So,"Sole effect method"may greatly impact on the government regulatory power, which therefore should be abandoned. Hence, the comprehensive utilization of the three criteria is the acceptable. Furthermore, the criteria and method should be improve in the IIAs.The forth chapter of the thesis studies the issues where government should not bear compensation obligation. Due to the subjective in the process of determing indirect expropriation, strict implementation of"effect and nature method"can not completely exclude the possibility of compensation responsibility of government's necessary regulatory measures for the sake of public interests such as public health and security. Therefore, according to the principle of state sovereignty, if the measures taken for the sake of environmental protection, human rights and pursuance of important social and economic objectives constituted indirect expropriation, the state should be exempt from the compensation obligation. This is called"police powers exceptions", which is legal in accordance with certain specific circumstances. The premise for police powers exceptions should be in the legal area of police powers, and the exceptions should be in conformance with the requirements of"bona fide", nondiscrimination, due process and slightest harm.The fifth chapter of the thesis analyses the relationship between indirect expropriation and compulsory license. Intellectual property rights (IPRs) have long been recognized as a form of"investment"entitled to protection under IIAs. IPRs are also one part of the object of indirect expropriation. Through the compulsory license, a government authority interferes directly with a privately owned IPRs, to authorize its use by the government or by one or more third parties. From the view of indirect expropriation, if the IPRs is a foreign investor's investment, the authorization of a compulsory license is a government action which could create a direct impact on FDI involving intellectual property. According to the criteria and method to determine whether a government measure constitutes indirect expropriation, the authorization of a compulsory license may constitute indirect expropriation in terms of the jurisprudence analysis. If a compulsory license constituted indirect expropriation, comparing with the provisions concerning compulsory license in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement),there are rather differences between the requirements on lawful expropriation in IIAs and the requirements for compulsory license in TRIPS Agreement, especialy in the aspects of due process and compensation. Accordingly, the level of protection in IIAs is higher than in TRIPS Agreement. Consequently, foreign investor may claim against host states by investor-state dispute settlement process based on the provisions of expropriation. If so,it is not good to realize the value of compulsory license institution,and this departes from the tenets of creating the institution. Thus compulsory license should definitely be excluded from the application of indirect expropriation provisions.Of course,the"Police Power exceptions"should also be applied to compulsory license.The sixth chapter of the thesis investigates related provisions on indirect expropriation in the IIAs of China, and puts forwards some advice for improving these provisions.As for the definition of investment, the IIAs of China adopt a broad assets-based formulation,which greatly increase the possibility of indirect expropriation resulting from regulatory measures of state.So far,there are't provisions concerning the definition of indirect expropriation and the criteria for determining whether a indirect expropriation has in fact taken place in the majority of the IIAs. The majority of the IIAs don't provide the exceptions of"police powers"and compulsory license. As to dealing with the issues of indirect expropriation,it may be said that there are severe law faults in the IIAs of China. As a big developing country which is exerting itself to transform the development mode,and a capital importing and exporting country,China is confronted with the problem of indirect expropriation. Therefore, under the guidance of the notion of sustainable development,China should definitely establish its IIAs policy and position,think over how to balance different values,such as the economic development,social progress, protection of environment and human rights,and amend related provisions in IIAs.It is necessary to amend and enrich the preliminary remarks of IIAs, definitely define the definition of indirect expropriation, ameliorate the definition of investment in international investment agreements,improve the criteria and approach to determining whether indirect expropriation has occurred, properly make use of the exceptions of indirect expropriation.