The Uncertainty of Legal Doctrine in Indirect Expropriation Cases and the Legitimacy Problems of Investment Arbitration

Abstract

Investment arbitration is plagued with a backlash from states, potentially leading to a crisis of legitimacy in the investor-state system as a whole. This has arisen primarily from states not being able to enact public policy to pursue their agendas without having to provide substantial compensation to investors. In developing countries, expropriation has been direct and indirect; however, developed countries are also facing problems as they enact socially and ecologically progressive legislation that is seen as indirectly expropriating foreign investors' assets. The recent case of Yukos suggests that arbitration panels are not deterred by the size of investors' claims and are willing to rule in favor of them accordingly. This article argues that recent cases related to indirect expropriation have not settled on the test that should be used, even though they have maneuvered towards a more conciliatory approach that takes into account both the sole effect of the legislation and its purpose. The problem herein lies in the tribunals relying on abstract and open-textured norms in investment arbitration treaties that enable the enactment of real politics in favor of the sole effects test. Understanding the contribution that doctrine makes in creating uncertainty and ambiguity is an important step for arbitration because it encourages states to (1) negotiate and develop more specific rules and (2) determine which rules address their concerns about what "public interest" is in favor of certain states wanting to indirectly expropriate property. Tribunals rarely consider the legitimacy and value of the public interest for which the state enacted policy and legislative measures. As this article argues, this doctrinal uncertainty in relation to indirect expropriation is an issue for the ongoing legitimacy problems in investment arbitration, despite attempts to procedurally reform the system to avoid impressions of bias.