The Indirect Expropriation Conundrum and the States’ Response - Korea’s Experience and Lessons Learned -

Protection against indirect expropriation of foreign investment is often highly controversial as it may be perceived as an undue restraint on the host state’s ability to implement legitimate public policy. Further, the distinction between compensable indirect expropriation and non-compensable government regulatory action under the international investment law is murky, engendering much confusion and unpredictability. Such unclarity has led arbitrators in investor-to-state dispute cases to exercise wide discretion in determination of indirect expropriation claims, and some arbitrators exercised the discretion to construe the concept of indirect expropriation expansively. In response, some states began to curb arbitrator’s discretion through careful drafting of treaty language on expropriation. The investment chapter of the Korea-US Free Trade Agreement that went into effect in 2012 is a good example of such trend. Annex 11-B of the KORUS FTA contains a relatively detailed set of provisions elaborating the definition of indirect expropriation and providing the guidelines on how the concept should and should not be interpreted. To wit, such provisions have tried to circumscribe arbitrator’s discretion to interpret the scope of indirect expropriation expansively. Such provisions surely have provided more clarity on this issue, and thus, added security for the policy space of Korea as the host state. Therefore, Annex 11-B has since become the template for the equivalent interpretative Annexes and expropriation provisions in Korea’s subsequent free trade agreements and BITs. However, it is also true that such approach has limits and its own problems. Ambiguities still remain with respect to some of the phrases and concepts used in such interpretative Annexes, and their textual variations will hinder the development of consistent and coherent arbitration case law on indirect expropriation. Therefore, the ideal solution to the problem of indirect expropriation will be conclusion of a multilateral instrument under which a reliable case law on the understanding of indirect expropriation can be developed.