The Criterion For Identification Of Indirect Expropriation And Its Implication For China

As the most strict form of state intervention in private property rights,expropriation has always been an important issue of concern to investors,especially to foreign investors.Just like territorial sovereignty,customary international law recognizes and respects a country's expropriation rights.At the same time,it holds that the exercise of expropriation rights should meet four conditions: public purpose,non-discrimination,due process and appropriate compensation.In the mid and late nineteenth century,the controversy on expropriation mainly focused on "how to determine the compensation for expropriation",while in the past three decades,"whether there is expropriation" has become a prominent issue in arbitration practice.This is because when it comes to environmental protection,public safety and labour protection,there are situations in which the host country deprives or substantially deprives foreign investors of their property rights without satisfying the conditions for exercising the expropriation right.In this case,the host country generally advocates that its behavior is an act of a country exercising its right of control,which does not constitute expropriation and does not require compensation.Foreign investors believe that such behavior of the host country constitutes indirect expropriation.Indirect expropriation,as one of the forms of expropriation,does not require the transfer of investors' ownership,Its diversified behavior makes it difficult to detect.In most cases,indirect expropriation is not different from a country's normal exercise of management rights.In other words,when the host government realizes the allocation of social and economic benefits through regulatory measures for public purposes,it will face the risk of being recognized as indirect expropriation if it causes substantial deprivation of one or all of the property rights of foreign investors.Obviously,there is a contradiction objectively between the exercise of the host country's control right and the protection of investors' private property right.If the scope of indirect expropriation is expanded,the space for the host country to exercise the control right will be compressed.Conversely,if the scope of the host country's exercise of regulatory measures is expanded,then the property rights of investors will be threatened,because it is generally believed that regulatory measures need not be compensated.Therefore,the identification of indirect expropriation is the process of distinguishing it from the regulatory measures of the host country,which is of great significance for balancing the protection of the control rights of the host country and the private property rights of investors.At present,three indirect expropriation criteria have been established,sole effect test,sole purpose test,effect and purpose test.In specific arbitration cases,the application of the criteria for determining indirect expropriation is often based on the judgment of specific elements.As far as sole effect test is concerned,it mainly measures the "effect" factor,i.e.the size of the economic impact of the host government's intervention on foreign investors.Generally speaking,the economic impact can be judged by whether the intervention has a permanent and substantial deprivation effect on the investor's investment.Of course,it is not excluded that in some exceptional cases,even if it has caused serious economic impact,The action still cannot be recognized as indirect expropriation such as the host country's economic loss to the investor is not accountable,or the investor should have expected it.It is not considered indirect expropriation without anticipating government intervention and economic damage.For sole purpose test,the main factor to be measured is the "purpose" factor,that is,whether the "public purpose" is used as the criterion to judge indirect expropriation.The so-called "public purpose" does not refer to all government actions to achieve social and public welfare,but refers specifically to "public purpose" in areas of major public interests,such as environmental protection,public safety,labor rights and other fields.Under sole purpose test,investors with heavy burden of proof can support their claims by proving that the host government's actions violate the principle of non-discrimination or do not conform to fair procedures.Among the two criteria mentioned above,a certain factor is taken as the decisive basis for determining indirect expropriation,while effect and purpose test considers both the "effect" factor and the "purpose" factor,and introduces the principle of proportionality as one of the criteria for judging whether indirect expropriation is constituted,that is,by measuring the "purpose" of government behavior and the "effect" caused by government behavior.The criterion aims to balance the interests of the host country and investors by applying the principle of proportionality when the two conflicts occur.The study of the criteria for determining indirect levy is helpful to ensure the smooth development of international investment.China's dual status as both a major capital exporting country and a major capital importing country also determines that we must adhere to the criteria of both effect and purpose.Therefore,China needs to clarify this standard in treaty practice and arbitration practice in international investment activities,which will help to improve our ability to prevent indirect levy risks and safeguard our legitimate interests.