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Oxford University Press




Bilateral investment treaties (BITs), which have proliferated at an astonishing pace in the past decade, commonly seek to establish a stable, orderly framework for foreign investment by creating "favorable conditions for greater investment by nationals and companies of one state in the territory of the other state." Unlike their predecessors of an earlier generation, i.e., friendship, commerce, and navigation treaties (FCNs), in the area of foreign investment, BITs require more than the mere prohibition of expropriation without compensation. The BIT generation, weaned on Hayek and navigating amid the detritus of hundreds of well-intentioned but disastrous multilateral and national development programs, has come to appreciate that the profits of the foreign investor, no less than the benefits of the multiplier effect for the host state's economy, require an appropriate normative framework: impartial courts, an efficient and legally restrained bureaucracy, and the measure of transparency in decision that has increasingly been recognized as a control mechanism over governments and a vital component of the international standard of governance. In a BIT regime, the host state must therefore do far more than simply open its doors to foreign investment and refrain from overt expropriation; it must also establish and maintain the legal and normative environment that modern investment theory recognizes as a conditio sine qua non for the success of private enterprise. BITs, in short, consciously seek to approximate in the developing, capital-importing state the minimal legal, administrative, and regulatory framework that fosters and sustains investment in industrialized, capital-exporting states.

Recognizing the need to attract foreign capital and technology, putative capital-importing states do not wish to be perceived as posing a frequent or arbitrary threat of expropriation; and with the eclipse of socialism, direct expropriation has become relatively rare. But the threat of indirect expropriation remains and has probably increased. In particular, in the BIT generation, two principal species of indirect expropriation can be identified and distinguished: creeping and consequential expropriations. A creeping expropriation denotes an expropriation accomplished by a cumulative series of regulatory acts, malfeasance, and omissions (perhaps interspersed with lawful acts) over a prolonged period of time, no one of which can necessarily be identified as the decisive event that deprived the foreign investor of the value of its investment. Consequential expropriations consist in the host state's failure to create, maintain or properly manage the normative framework vouchsafed by the relevant BIT. Neither of these forms of expropriation would have been clearly, if at all, recognized in the FCN generation. Yet both pose acute and novel problems with respect to (i) the determination of liability, i.e., at what stage the host state's regulatory measures or non-feasance should be deemed expropriatory; and (ii) valuation, i.e., as of what date the value of property rights so expropriated should be appraised. We therefore suggest that in certain cases, to respect Chorzów Factory's requirement of restitutio in integrum, tribunals will find it useful and appropriate to disaggregate the "moment of expropriation," which goes to liability, from the "moment of valuation," which goes to damages. Recognition of these forms of indirect expropriation and reflection on the appropriate means for their valuation will contribute in the long term to fortifying the stable and predictable legal environment for foreign investment upon which foreign investors and developing states alike depend in the BIT generation.

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