Indirect Expropriation – A Narrower Concept in Contemporary International Investment Law: Balancing Regulatory Sovereignty and Investor Protection

The doctrine of Indirect expropriation is one of the controversial concepts in International Investment Law. It determines in which situations a state will compensate a foreign investor. The main concern of indirect expropriation is government action by the host state that substantially affects the use, enjoyment, or economic value of an investment while legal ownership remains with the investor. The doctrine generated considerable debate because earlier arbitral awards interpreted this doctrine in a broader way, which threatened autonomy by exposing the government’s ordinary public welfare regulation relating to public health, environmental protection, and legitimate governmental objectives. This article argues that modern treaty drafting, arbitral jurisprudence, and the acceptance of the police powers doctrine have narrowed the doctrine. By examining some treaties like the United States Model Bilateral Investment Treaties, the Energy Charter Treaty, and leading arbitral decisions including Methanex v United States, Saluka Investments BV v Czech Republic, LG&E v Argentina, and ParkeringsCompagniet AS v Lithuania, this article demonstrates that to claim indirect expropriation it must be prove some requirements like severe and lasting deprivation of investment value, investors legitimate expectations, and creates a careful consideration of the purpose and nature of the governmental action. The article further argues that the protection of investor rights to get compensation for genuine expropriation is ensured by the treaty standards, such as Fair and Equitable Treatment and Full Protection and Security. The contemporary framework reflects a balanced approach protecting both parties’ rights and also preserving regulatory sovereignty by maintaining protection for foreign investors.