Since the concept of regulatory expropriation originally developed under U.S. case law has been adopted as the concept of indirect expropriation under international investment law, the recently concluded bilateral and multilateral investment agreements have increasingly introduced the investor-state dispute settlement (ISDS) clause with indirect expropriation as the cause of the claim. The ｢Korea-US Free Trade Agreement｣ (Korea-US FTA), reflecting this trend, has also introduced these provisions of indirect expropriation and ISDS in the Investment Chapter (Chapter 11: Investment). Therefore, in the future, where Korea becomes a litigation party in an ISDS case of which indirect expropriation is the cause of the claim, it is essential to understand the legal principles concerning the criteria and scope of indirect expropriation. This is because the legal consequences of an ISDS litigation which indirect expropriation is the cause of the claim will be very different according to the applied criteria and scope for recognizing indirect expropriation, such as being regarded as compensable indirect expropriation or a non-compensable regulatory measure.
As for the criteria for recognizing indirect expropriation under the international investment law, ‘effectiveness test’, ‘purpose test,’ and ‘proportionality test’ have traditionally been established based on arbitration jurisprudence. Among these various standards, arbitral tribunals have mostly adopted ‘proportionality test’ in recent arbitration cases of indirect expropriation, and it is gaining a lot of persuasion. Accordingly, it is necessary to comprehensively review and analyze related theories and major arbitral awards under the international investment law, particularly focusing on the ‘proportionality test’ that has recently become mainstream.
Meanwhile, many concerns have been raised in the process of signing the Korea-US FTA because it is not clear whether Korea’s constitution and legal system are appropriate for domestically applying the indirect expropriation and ISDS clauses, or whether major national policies such as real estate policies can be regarded as legitimate regulatory measures under the standards for recognizing indirect expropriation including ‘proportionality test’. In this aspect, this paper reviewed and analyzed whether indirect expropriation provisions are domestically applicable under the Korean legal system and, if applicable, in which national policy areas they can be applied, and whether they are suitable for the ‘proportionality test’.
Contrary to initial concerns, the ‘proportionality test’ for indirect expropriation is not unfamiliar to us, and it has already been reflected and applied as a ‘principle of proportionality’ through the judicial decisions of Constitutional Court or the Supreme Court regarding the major national policies, such as real estate policies including development restriction zones or long-term unexecuted urban planning facilities. Therefore, if Korea’s major domestic policies or measures are submitted to arbitration in an ISDS litigation of which indirect expropriation is the cause of the claim, the ‘principle of proportionality’ applied in domestic litigations should be actively and properly utilized in arbitration proceedings. In addition, legal and institutional revision and improvements should be continuously implemented for bridging the gap between the generally established law of indirect expropriation under the international investment law and Korea’s major domestic policies and measures.