INDIRECT EXPROPRIATION AND THE PROTECTION OF PUBLIC INTERESTS

This article analyses what is widely known as the police powers exemption found in modern international investment agreements, with a focus on mega-regional trade and investment agreements. It explores its legal nature and requirements, the burden of proof and issues of compensation. In an attempt to curb (indirect) expropriation claims, the exemption carves out non-discriminatory regulatory measures from the scope of indirect expropriation and in such situations no compensation needs to be paid. It follows that, as a rule, foreign investors are not protected against the adverse economic effects of regulatory measures. The key question addressed is whether host States can increase the level of protection given to public welfare objectives through the use of this exemption without having to compensate investors for the measures taken. The article argues that, under the proportionality test embodied in the exemption, States can provide the level of protection that they desire without incurring a risk of liability as regards expropriation claims.