


































Economics, Law and Policy 
ISSN 2576-2060 (Print) ISSN 2576-2052 (Online) 

Vol. 8, No. 2, 2025 

www.scholink.org/ojs/index.php/elp 

125 
 

Original Paper 

The Iran–United States Claims Tribunal: Revisiting Indirect 

Expropriation in International Investment Law 

Yanhui Han
1*

 & Yu Huang
2
 

1
 School of Law, Shanghai University of International Business and Economics, Shanghai, China 

2
 Law School, Renmin University of China, Beijing, China 

*
 Corresponding Author 

 

Received: July 3, 2025        Accepted: July 17, 2025       Online Published: July 18, 2025 

doi:10.22158/elp.v8n2p125               URL: http://dx.doi.org/10.22158/elp.v8n2p125 

 

Abstract 

Indirect expropriation remains a contentious and challenging issue in both theory and practice. From 

the late 20th century into the 21st, the central conflict in international investment law lies between 

sovereignty and the protection of private property. The deepening of economic and trade globalization 

has given rise to a renewed form of “Calvoism,” placing foreign investors’ interests in host states 

under increasingly complex circumstances. The Iran-United States Claims Tribunal was the first case 

to spur international research on indirect expropriation. The debate over whether losses to foreign 

investors should be borne by governments or private parties established an efficient paradigm for 

resolution and offers instructive insights on attributing responsibility. However, the paradigm for 

addressing indirect expropriation remains largely monolithic. In the current era of faltering 

globalization, indirect expropriation requires fresh reassessment. 

Keywords 

International Investment Law, Indirect expropriation, Calvoism, Iran-United States claims tribunal 

(IUSCT), globalization 

 

1. The Iran-United States Claims Tribunal’s Determination of Expropriation Allegation 

The Iran-United States Claims Tribunal (IUSCT), established in 1983, differs from other ad hoc arbitral 

tribunals due to its unique context arising from Iran’s political transformation and the multiple disputes 

with the United States. Under the mediation of Algeria, the two parties reached the Algiers Accords, 

which comprised three agreements: the General Declaration, the Claims Settlement Declaration, and 

the Undertakings. Excluding the majority of private claims, among the 77 intergovernmental 

compensation cases resolved by the Tribunal, a substantial number involved indirect expropriation 



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(Iran-United States Claims Tribunal, Case No. 98 Chamber Two, Harza Engineering Company v. 

Islamic Republic of Iran, Award No. 19-98-2). 

1.1 Tribunal’s Definition and Manifestations of Expropriation 

The Tribunal distinguishes its terminology for “expropriation” from common usage. It prefers the term 

“deprivation” over “taking”, the latter corresponding to the academic concept of expropriation, under 

which the State acquires private property for public purposes and pays compensation. Although largely 

synonymous, “taking” may imply that the State has acquired something of value, which is not accurate 

in cases of indirect expropriation. Indirect expropriation does not involve formal acquisition of lawful 

property rights, but rather interference with those rights. Today, domestic social reforms rarely require 

formal seizure of physical assets; instead, foreign investors’ rights may be affected by State measures 

that confer the benefits of private property to the host State, not through formal taking but with 

equivalent effects (Maurizio,  B., 2001, pp. 203-212). 

Because the Iranian government adopted various formal and informal measures affecting U.S. 

investors’ interests, the Tribunal was uniquely positioned to shape legal developments in this realm. 

Each of its three Chambers issued significant rulings concerning foreign investment. One claimant 

emphasized that the Tribunal’s significance lay in its analysis of compensation amounts. However, the 

Tribunal’s rulings were even more significant in determining the extent to which host-State 

interference constitutes expropriation under contemporary international law. There is no doubt that the 

actual seizure of property constitutes expropriation (Seddigh, H., & Aldrich, G.  H., 2017, pp. 585-609). 

What remains unclear is whether informal actions affecting international investment constitute 

expropriation. 

Indirect expropriation in intergovernmental claims before the Tribunal manifests in varied forms that 

defy a single, detailed definition. Traditional scholars distinguish among nationalization, requisition, 

and confiscation. Requisition is defined as the State taking possession of assets and rights held by a 

foreign national, usually promptly and with fair compensation. In contrast, nationalization is broader: 

the State acquires property to deploy natural resources and means of production for social purposes 

under economic and social reform initiatives. Confiscation refers to the State deliberately impounding 

property without adequate compensation, typically depriving owners of any right to restitution or 

damages. 

Interference with private property thus includes various asset types and revenue streams, with core 

property rights differing across jurisdictions. For tangible property, the most direct instances involve 

U.S. citizens suing Iranian state-controlled banks that, despite holding the property, refused to honor 

checks amid U.S.-Iran tensions. Although Iran argued there was no intent to expropriate, the Tribunal 

emphasized that “the State’s intent is less significant than the effect on the property owner, and the 

form of interference is less important than its actual impact”. 

 

 



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Regarding intangible property, the Tribunal adjudicated cases where Iran had nationalized U.S.-owned 

shares in Iranian companies—such as AIG’s 35 % stake in an Iranian insurer—without timely 

compensation, as well as instances where a U.S. oil company purchased shares in a state-owned 

enterprise but never received delivery . 

1.2 Principle of Actual Deprivation 

These cases largely arose from Iran’s social revolution, during which the new government implemented 

a series of expropriatory measures targeting U.S.-affiliated interests. Iran rarely formally nationalized 

U.S. assets; rather, it assumed control over U.S. government or private assets, which produced effects 

indistinguishable from direct expropriation. However, unlike direct takings, the Tribunal did not deem 

these state actions—purportedly taken for public interest—to justify prompt, full and effective 

compensation, and thus it often disregarded treaty-violation claims made by either party. A typical 

example is Chamber Two’s case involving ITT Industrial Holdings, Inc., wholly owned by Sweden’s 

IKO Company, which held a 25 % stake in IKO Iran. In December 1980, the Iranian government 

appointed four board members to IKO Iran, and shortly thereafter the fifth, displacing five 

shareholder-elected directors, including those chosen by the claimant. 

Before the claim was resolved, ITT argued that this de facto control amounted to interference with its 

interests and warranted prompt, full and effective compensation. Iran responded that the takeover was 

temporary, and thus did not constitute compensable expropriation. It cited an amendment to the 

Industrial Protection and Development Act, which established a five-member committee to determine 

final ownership of government-supervised companies. The Tribunal found that Sweden’s IKO had 

been deprived of management rights and access to financial information regarding IKO Iran. The 

Tribunal noted that state-appointed officials owed no fiduciary duty to shareholders and managed the 

company to the detriment of shareholder interests. In a concurring opinion, arbitrator Aldrich 

articulated the appropriate standard for expropriation: 

“While governmental control over property does not in itself warrant a conclusion that the property has 

been taken by the government requiring compensation under international law, once events show that 

an owner has been deprived of fundamental ownership—and such deprivation appears not merely 

temporary—there is justification for drawing that conclusion. The state’s intent is less important than 

the effect on the owner, and the form of control or interference is less significant than its real impact.” 

Clearly, the Tribunal avoided assessing the legality of state actions, focusing instead on whether actual 

harm had occurred to determine expropriation and award compensation. Chamber Two’s adoption of 

the actual deprivation principle does not afford the host State sufficient liberty to govern its economy in 

pursuit of development. Though the standard may reassure investors by extending protection, it is 

unlikely to reduce the frequency of coercive state measures—a concern commonly referred to as the 

“police powers doctrine.” When a host State’s sovereign acts are interfered with, this can cause tension 

with investors (Li,  Z. R., 2021, pp. 19-39). Accordingly, Chamber Two prioritized the investor’s actual 

loss over whether the State intentionally deprived property. The Tribunal’s reliance on the 



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actual-deprivation standard aligns with its goal of encouraging investment. If host States were certain 

their actions—even those taken for public interest—would trigger compensation, the international 

investment climate could suffer significantly. 

 

2. Legal Basis and Standards of Expropriation 

2.1 Legal Basis and Fundamental Standards 

Renowned European scholar Christoph Schroeder states in an article on expropriation that: “Under 

international law, expropriation is not per se unlawful. Undoubtedly, a State has the right and authority 

in principle to expropriate the property of nationals and foreigners. However, lawful expropriation of 

foreign-owned property is subject to certain conditions—commonly referred to as public purpose, 

non-discrimination, due process of law, and prompt, adequate and effective compensation.” 

The legal foundations of expropriation in both domestic and international law converge in requiring 

that expropriation serve a public purpose, but diverge fundamentally due to domestic legislation being 

based on sovereign prerogative, whereas international law is premised upon reciprocal negotiation 

between states (Rudolf, D., 2002). 

Although the 1968 establishment of the Iran-U.S. Claims Tribunal catalyzed interest in indirect 

expropriation, international conventions on expropriation had already been drafted in 1961. For 

example, the Harvard Draft Convention on State Responsibility for Injury to Foreigners provides that 

when there is “unreasonable interference with the use, enjoyment or disposal of property, so as to 

justify the inference that its owner will be unable to exercise those rights within a reasonable time after 

the interference began,” foreign private property is deemed expropriated (Christoph Schreuer. The 

Concept of Expropriation under the ECT and Other Investment Protection Treaties, CL-0272, revised 

20 May 2005). 

A more prominent example is Article 1 of the European Convention on Human Rights, which enshrines 

the principle that everyone has the right to peaceful enjoyment of their possessions, and that no one 

shall be deprived of those possessions except in the public interest and under conditions provided for 

by law and by general principles of international law. It adds that such provisions must not impair a 

State’s right to enforce laws governing property use or to collect taxes or other contributions. 

From this comparative perspective, the primary justification for expropriation remains public purpose, 

yet the Convention also emphasizes domestic enforcement powers, underscoring that the protection of 

private property—even for foreign investors—is ultimately premised on respect for State sovereignty. 

Of course, these are early treaty provisions. Since the 1980s, the proliferation of indirect expropriation 

cases—arising from diverse government regulations that adversely affect foreign investors—has shifted 

the central conflict to be between the protection of private property and the principle of sovereignty. 

In principle, the principal distinction between direct and indirect expropriation is that in the latter the 

investor retains legal title to the investment, whereas in direct expropriation the title itself is lost. 

Nevertheless, in certain circumstances—especially in cases of gradual or creeping expropriation—the 



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boundary between direct and indirect expropriation is not always clear. 

2.2 Principle of Public Purpose 

The principle of public purpose has often been sidelined in discussions of indirect expropriation, 

although host States frequently invoke it—arguing that when state action is justified by public purpose, 

foreign investors must bear the resultant loss risk, and thus compensation becomes contentious. 

NAFTA’s expropriation provision illustrates this: 

“No Party may directly or indirectly nationalize or expropriate an investment of an investor of another 

Party in its territory or take a measure tantamount to nationalization or expropriation (‘expropriation’), 

except: (a) for a public purpose; (b) on a non-discriminatory basis; (c) in accordance with due process 

of law; and (d) on payment of compensation.” 

Does indirect expropriation require consideration of public purpose? Because invoking public purpose 

may immunize state measures from illegality under expropriation provisions, the issue becomes one of 

compensation rather than unlawfulness. Under international investment law principles and practice, 

foreign investment inherently carries the risk of host-state regulatory or political shifts—precisely the 

driver behind most indirect expropriation claims. For example, in a 1998 dispute by a U.S. 

environmental services company against Mexico, Mexico declared an environmental emergency and 

without adequate compensation designated the area as an ecological reserve, halting the company’s 

project. The tribunal found this constituted indirect expropriation and proceeded without any reference 

to public purpose (Reisman, W. M., &  Sloane, R. D., 2004). 

Similarly, the Iran-U.S. Claims Tribunal sidestepped Iran’s claimed intent and, like the Mexico tribunal, 

did not exempt measures taken for public purpose from liability; in both contexts, the result was State 

liability for compensation. These parallel findings suggest that whether public purpose applies is not a 

factor in determining the existence of indirect expropriation. Once a measure is found to equate to 

direct expropriation, the focus shifts to whether it meets public purpose—a question tribunals typically 

avoid, as it treads on core sovereign prerogatives. Consequently, international investment tribunals 

have consistently prioritized the effects-based approach. If one were to accept that the Iran-U.S. Claims 

Tribunal overlooked public purpose because of Iran’s exceptional political situation, then in more 

stable jurisdictions, allowing public purpose to excuse investor harm would place States entirely on the 

defensive. While some modern instruments incorporate a “proportionality test”—emphasizing state 

intent—such tests, in essence, restrict sovereign discretion and ultimately increase state risk under BITs 

(Rosalyn, H., 1982). 

Indeed, many BITs contain vague or no provisions on indirect expropriation. One notable exception is 

the U.S.-Uruguay BIT (Annex B, Article 4), which clearly defines indirect expropriation: “Indirect 

expropriation means a situation where an action or series of actions of a Party has an effect equivalent 

to direct expropriation without formal transfer of title or outright seizure.” Moreover, it provides that: 

“Except in rare circumstances, non-discriminatory regulatory actions designed and applied to protect 

legitimate public welfare objectives, such as public health, safety and the environment, do not 



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constitute indirect expropriation.” This clause transforms public purpose from a defense to an 

affirmative exclusion—a more balanced model. However, because it grants interpretative authority to 

the host State regarding public welfare objectives, the investor may remain disadvantaged (Wen, L., 

2022, pp. 73-90). If “do not constitute” were replaced by a requirement for State-investor consultation, 

the U.S.-Uruguay model would embody a more mutually equitable approach—legally precise and 

practically cooperative. 

Therefore, the critical issue in BITs concerning indirect expropriation lies in how both parties refine the 

expropriation clause. Merely acknowledging a State’s sovereign right to regulate is insufficient for 

defining indirect expropriation. Regulation is not prohibited, but when it causes substantial harm, 

compensation must be provided. Similarly, a presumption favoring certain regulatory actions is not 

enough; it must be explicitly stated that some measures—such as police powers measures—regardless 

of their adverse impact on investment, do not constitute expropriation. Clear definitions excluding 

police powers measures would offer greater legal certainty for host States and foreign investors. 

Accordingly, drafting a clause that defines standards for police powers measures would clarify the 

concept. Developing a non-exhaustive list of factors for tribunals to consider in determining indirect 

expropriation represents a constructive step—but it should avoid vague references to an investor’s 

“legitimate or reasonable expectations,” and instead specify what constitutes the “nature” of a measure. 

Where potentially irreconcilable standards arise—such as between economic impact and the nature of 

the measure—implementing a hierarchical test would be advantageous (Dan, W. H., & Zhang, S., 2008, 

pp. 1-15, p. 21). 

Ideally, a comprehensive renegotiation of existing BITs should incorporate these new clarifications and 

exclusionary provisions to enhance legal certainty and balance between regulatory prerogatives and 

investment protection. 

2.3 NAFTA Case Analysis: Metalclad v. Mexico and Tecmed v. Mexico 

Under NAFTA jurisprudence, Metalclad Corp. v. Mexico (2000) and Tecnicas Medioambientales 

Tecmed S.A. v. Mexico (2003) provide landmark guidance on the contours of indirect expropriation. In 

Metalclad, a U.S. waste-management firm secured federal approval to build a hazardous-waste landfill 

in Guadalcázar, yet municipal authorities withheld the local construction permit and reclassified the site 

under an ecological decree. This covert interference, the tribunal held, effectively deprived the investor 

of both operational use and expected economic returns. Relying on NAFTA Article 1110’s “economic 

impact test”, the ICSID tribunal concluded that such non-formal regulatory measures could indeed 

amount to expropriation and awarded approximately USD 16.7 million in damages. The tribunal 

emphasized that legal title or formal transfer was not necessary where the economic substance of state 

action substantially interfered with the investment. 

Similarly, in Tecmed, the tribunal found that Mexico’s refusal to renew a landfill permit permanently 

stripped away the economic value of the investor’s facility. While acknowledging the regulatory nature 

of the measure, the tribunal introduced a proportionality analysis, critiquing the state’s actions for 



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lacking transparency, proportionality, and respect for the investor’s legitimate expectations. As a result, 

the measure was deemed expropriatory, reinforcing that police-powers defenses must be scrutinized 

through proportionality and fairness lenses. These cases collectively affirm that indirect expropriation 

hinges on economic substance rather than formal acts; that investors’ legitimate 

expectations—especially those grounded in regulatory assurances—must be protected; and that 

invoking public‑interest regulation does not guarantee immunity when proportionality or transparency 

is absent. They complement the jurisprudence of the Iran-U.S. Claims Tribunal and the treaty-based 

analysis, underscoring the need for investment treaties to clearly delineate between permissible 

regulation and compensable expropriation. This suggests a treaty design that includes explicit carve‑

outs for bona fide regulatory measures, introduces a proportionality framework, and mandates pre‑

regulatory consultation mechanisms, all of which balance state regulatory autonomy with investor 

protection. 

2.4 Challenges in Determining State Action 

The party responsible for expropriation is always a State. Aside from the public purpose criterion, 

determining indirect expropriation under international law is inherently challenging because it requires 

distinguishing between legitimate regulatory action and expropriatory conduct. The former, lawful 

under international law as a manifestation of sovereign authority, is known as police powers, while the 

latter—though its legality may be set aside—triggers the State’s obligation to compensate. Whether and 

how much compensation is owed thus becomes the central point of dispute. 

The Iran-United States Claims Tribunal, favoring an effects-based test, has applied the police powers 

doctrine—though mostly in investor-State cases rather than inter-State disputes. A notable example 

involves an Iranian claimant whose liquor license and restaurant were seized by the U.S. Internal 

Revenue Service to cover unpaid employment withholding taxes exceeding USD 70,000. The claimant 

sought compensation for losses resulting from forced asset disposals. The Tribunal observed that the 

IRS admitted seizing both the premises and the license to recover legitimate tax debts, and stressed that 

a State should not be liable for economic loss caused by lawful, non-discriminatory tax measures or 

other actions falling within recognized police powers (James, D. W., 2014). The claimant presented no 

evidence that the seizure targeted him because of his nationality or that it was intended to permanently 

strip him of his assets. The Tribunal dismissed the claim, noting that the claimant failed to demonstrate 

that the IRS acted beyond its authority or outside the scope of legitimate tax enforcement. 

Amid tense U.S.-Iran relations, the same claimant later alleged the U.S. failed to protect his property in 

Turlock, California, from acts of anti-Iranian violence. The Tribunal dismissed this claim as well, 

stating that a State cannot guarantee the safety of foreign nationals or their property. It further held that 

State liability for police or fire protection arises only if protection falls below minimal reasonable 

standards, considering resources available. The claimant failed to show that local authorities did not 

meet these standards. 

 



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Thus, the Tribunal articulated a robust application of the police powers doctrine: States are not 

responsible under international law for economic loss arising from bona fide exercise of police powers. 

While benign regulation under police powers is more controllable than policy reforms or economic 

restructuring, the term “regulation” remains broad. If domestic legislation does not clarify the 

applicability of regulatory measures to foreign investors, differentiating between regulation and 

expropriation remains difficult. 

For example, China’s 《Foreign Investment Law》 provides detailed regulatory mechanisms and 

mandates prior consultation before policy adjustments, without invoking expropriation except under 

narrow public purpose exceptions, aligning with international practice. Such legislative clarity helps 

avoid confusion between regulatory action and expropriation beyond relying solely on arbitration or 

State-to-State dialogue. 

 

3. Risks of Calvoism 

3.1 Overview of Calvoism 

The doctrine of diplomatic protection originated from relations between Latin America and the United 

States. In other regions, such as Africa and Asia, extraterritorial jurisdiction was also used to uphold 

foreign nationals’ rights—for example, Ottoman-era capitulations in which certain European nationals 

benefited, or Sudan’s allowance for foreigners to be subject to their own laws. However, diplomatic 

protection as a practice was not exclusive to Latin America and the U.S.; it was later adopted by 

Western European states as well (Fabian, T., 2018, pp. 778-789). 

The first articulation of diplomatic protection in the modern sense emerged in Argentina through jurist 

Carlos Calvo and thus became known as the “Calvo Doctrine.” He introduced the standard of national 

treatment, grounded in the principles of non-intervention and sovereign equality, reinforcing the 

principle of non-discrimination. Calvo did not reject international standards outright; rather, he 

contended that both host-state nationals and foreign nationals should receive protection under the 

host-state’s domestic law. 

In his treatise Derecho internacional teórico y práctico de Europa y América (1868), Calvo argued that 

rules governing jurisdiction over foreign nationals and claims for compensation should be applied 

equally to all nations, regardless of power. He further asserted that foreign property holders in Latin 

American countries should first seek remedies in local courts before resorting to diplomatic protection 

or armed intervention. This prevents powerful states from exploiting weaker nations—a stance 

solidified in the famous Calvo doctrine: jurisdiction lies with the state where the investment is located, 

and no diplomatic or armed intervention should occur before local remedies are exhausted. 

Professor Sonaraja of the National University of Singapore summarizes Calvoism thus: “Foreign 

investment and the legal claims to protect it were viewed as tools through which the United States 

could maintain economic dominance in the region. The notion of supranational norms protecting 

foreign investors outraged Latin American jurists, who believed that protection should be found only 



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within the host-state’s domestic law.” 

Calvoism can be distilled into three core tenets: (1) rejection of supranational standards of treatment, (2) 

exclusive domestic jurisdiction, and (3) denial of diplomatic protection. This doctrine emerged from 

the early-stage tensions between developed (capital-exporting) and developing (capital-importing) 

countries in the international investment legal regime. Despite the leverage of developed 

nations—through treaty negotiations or exportation of privatized property ideologies—the structural 

imbalance meant that developing countries remained vulnerable to expropriation without adequate 

recourse. As globalization and assertions of sovereign control over natural resources intensified, 

Calvoism gradually waned. 

3.2 Impact of Calvoism on the International Legal Order 

nterpreting Calvoism as implying that a host State fully abandons recourse to international protection 

for acts constituting international wrongdoing, or that a foreigner’s injury is directly linked to their 

nationality, is challenging to reconcile with international law. If one accepts that rights protected under 

diplomatic protection are those of the individual—rather than those of the protecting State—then 

objections against the “Calvo clause” grounded in general international law lose much of their force. 

Professor James D. Wilets of Nova Southeastern University describes international law as functioning 

through a process of transnational legal harmonization (TLH). Although primarily descriptive, this 

concept frames globalization legally: cross-border legal harmonization involves coordinating rules 

rather than applying international norms through hierarchical supranational bodies. TLH includes 

standardized rules, definitions, or terms—developed by entities such as the ICC or UNIDROIT—that 

business actors worldwide integrate into contracts, rendering them legally binding in transnational 

transactions. Illustrative examples include Incoterms 2000 in international trade contracts and the 

UCP 600 for documentary credits. Moreover, the ICC has facilitated harmonization in areas like 

e-commerce, telecom, finance, insurance, tax, trade, investment, transport, anti-bribery, arbitration, and 

customs.  

Despite these harmonization efforts, indirect expropriation disputes between investors and host States 

reveal limitations. International organization agreements and conventions—though not issued by a 

central authority—are driven by collective will; however, bilateral investment treaties (BITs), which 

define investor eligibility and dispute resolution mechanisms, remain the regime’s main operative 

instruments. BITs are fundamental for investors insofar as they mitigate market access barriers in host 

States, enabling better market penetration and profit realization (Hallam, D., 2011, pp. 91-98). 

Once an investor enters another State’s sovereign territory, issues of fair treatment inevitably 

arise—this is a principal driver of indirect expropriation claims under investment arbitration. BITs 

protect investors’ property and prescribe risk and treatment clauses; crafting these clauses is often a 

matter of up to investor States and host States, making them contractual and based on the parties’ 

subjective intentions. 

 



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Investment involves not only capital and goods, but also cultural and social implications. Critics of 

globalization argue that its socio-cultural impact threatens stability and local cultures, particularly in 

developing countries. Conversely, when developed nations perceive that the spread of private property 

norms impinges upon their sovereignty beyond tolerable limits, they may impose 

barriers—representing a backlash against globalization. While globalization has altered the sovereign 

order, it has not fully eroded it. 

In the investment law domain, the tension between sovereignty and private property protection means 

that if Calvoism—or similar sovereignty-first legal orders—dominates, then transnational legal 

harmonization and globally coordinated rule-making will face significant obstacles. This is especially 

true when developed nations, such as the U.S., no longer grant investors equal rights under treatment 

guarantees. In such an environment, indirect expropriation becomes a frequent issue, undermining the 

global investment landscape. To address this, States need to incorporate detailed indirect expropriation 

provisions or robust consultation mechanisms in BITs or multilateral agreements (Seddigh, H., 2001, 

pp. 631-684). 

 

4. Conclusion 

The Iran-United States Claims Tribunal, while offering a resolution paradigm for indirect expropriation, 

also revealed the breadth and complexity of such issues in international investment. The Tribunal did 

not rely solely on the effects-based approach; its incorporation of the police powers doctrine afforded 

host States some regulatory space. Determining whether a State’s action constitutes expropriation 

hinges on the degree of interference rather than its legal type. Many State regulations and taxation 

measures are legitimate exercises of sovereign authority, yet they can still impact foreign direct 

investment. 

Currently, the evolution of international investment law revolves around finding a balance between a 

State’s sovereign regulatory domain and the protection of private property. Therefore, aside from 

sufficient emphasis and clarification in investment treaties, domestic legal frameworks regarding 

foreign investor treatment play a critical role—providing significant convenience in arbitral 

proceedings. 

There are few clear legal rules or customary principles on indirect expropriation; their ambiguity offers 

little help in resolving issues and undermines predictability. As a result, practice is essential to establish 

sound bilateral and multilateral investment frameworks. Regarding treaty drafting, signatory States 

should agree on precise definitions of indirect expropriation—particularly concerning widely applied 

regulatory norms. Indeed, it is the lack of a clear definition that allows divergent interpretations. 

Although identifying a fixed definition is difficult given its infinite potential applications, States can 

redraft provisions to clearly delineate the role and priority of the harmful effects test and other criteria. 

They may also consider adopting a sovereign grant standard alongside the effects test. Whether through 

eligibility criteria or explicit exceptions, new provisions should be clearer and more effective than 



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those in recent treaties. 

Ultimately, assessing whether a State measure constitutes indirect expropriation requires balancing the 

private rights of investors and the sovereign rights of the host State. Investors undoubtedly have the 

right to protect their assets, but States must retain sufficient capacity to safeguard the public interest as 

guarantors. International law may struggle to provide universally specific rules for indirect 

expropriation, but it is possible to achieve a more equitable balance between these interests. Indeed, 

international investment law has evolved partly through disputes that affirmed the primacy of private 

investor rights over a host State’s discretionary regulatory authority. However, as the field continues to 

develop, it becomes increasingly clear that the law must be rebalanced, now recognizing both the 

public interest of the host State and the economic rights of investors. 

 

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