ABSTRACT
Regulatory expropriation occurs where governmental regulations diminish the value of private property to such an extent that the regulation is deemed expro-priatory and compensation is payable. Investors have successfully claimed compensation for environmental regulations that diminished the value of their investment under the North American Free Trade Agreement. The primary concern with this form of expropriation is the possibility of ‘regulatory chill’, where governments are effectively prevented from introducing environmental regulations for fear of compensation claims from aggrieved investors. This effect is exacerbated by the uncertainty surrounding the circumstances when a state breaches the dividing line between legitimate regulation and regulatory expropriation.
On 1 January 2005, the Australia-United States Free Trade Agreement entered into force. The Agreement contains interpretative annexes to the expropriation provision in an attempt to clarify the responsibilities of governments and limit the scope of regulatory expropriation. The annexes are necessarily broad to encompass the wide range of measures that can potentially impact on an investor’s property rights. In particular, environmental regulation only constitutes indirect expropriation in ‘rare circumstances’.
Nevertheless, concerns remain that the provisions on expropriation are broader than the acquisition power in the Commonwealth Constitution, creating a wider range of situations where the government may be liable for compensation. This article delineates the scope of the expropriation provision and its interpretative annexes in the Agreement as it relates to environmental regulation that potentially diminishes the value of American investments in Australia. On comparison of the expropriation provisions in the Agreement with the acquisition power under the Commonwealth Constitution, it appears that the primary difference lies in whether the expropriating party is required to acquire a benefit.
