Sondra Faccio’s book is the result of long studies, started at the time of the author’s PhD programme at the University of Verona, when she carried out intensive research on the subject of ‘Indirect Expropriation in International Investment Law between States Regulatory Powers and Investors Protection’. The dissertation was defended in 2012. From the perspective of the evolution of the international investment law, a geological era passed since that time. The idea according to which this branch of the international legal system is exclusively aimed at the protection of investors’ interests has been gradually overcome and a different approach, which favours a balancing of these interests with non-economic concerns (expressed through the exercise of the host states’ police powers) has gained support. Accordingly, international investment law is now to be located ‘between State regulatory powers and investor protection’ (as the subtitle of the book says). This idea is the cornerstone of the book under review, as it deals with the evolution of the investor-state dispute settlement (ISDS) system through the prism of the institution of indirect expropriation and tries to shape a new approach in applying this standard, exactly in light of the need to balance the different interests at stake. The book shows good knowledge of existing scholarship and case law on the topic, even if with the lack of some recent decisions, and even if, in light of Faccio’s nationality, one would have appreciated some references in the book to the (many) important pieces of scholarship on the standards of treatment of foreign investment by Italian authors (both in Italian and English languages).

The book is divided in five chapters. Chapter I is aimed at introducing the work and, with this objective in mind, the author discusses the importance of international investment law to national economic development, which increased proportionally to the states’ need to attract foreign capital. As the author explains in Chapter II, however, the willingness to attract foreign investments never amounted to a complete waiver of sovereignty by host states. Indeed, since the 1920s, states have claimed their freedom to expropriate foreign investment and, in any case, to take decisions adversely affecting foreign investors’ rights. This circumstance moved the debate to the identification of the appropriate standards of protection of investors suffering the effects of measures consisting either in expropriation or in a lesser form of prejudice for their rights. In this regard, two kinds of standards gradually arose in practice. As to violations not involving a complete deprivation of property, the international minimum standard of treatmentFootnote ¹ initially emerged as the customary law form of protection of foreign investors. This standard has then been, in the vast majority of cases, replaced by the so-called fair and equitable treatment (FET).Footnote ² As to expropriation, nobody denied the right of states to take foreign investors’ property in the name of public interests, but it has been always affirmed that such a taking should follow the respect of the audi alteram partem principle and be accompanied with the payment of compensation. As to the scope of this compensation, there was a strong opposition between developed and developing countries, as the former insisted on the application of the Hull formula, according to which compensation for expropriation should have been prompt, adequate and effective, whereas the latter argued in favour of the subjective standard centred on an ‘appropriate’ compensation. In more recent times, mainly due to the text of international investment agreements and the case law of investment arbitral tribunals, the focus has shifted to the fair market value of the expropriated investments. According to some authors, only in cases of unlawful expropriations,Footnote ³ this value (so-called damnum emergens) shall be increased with the damages incurred by investors for loss of profits (so-called lucrum cessans). This is not the position taken by Faccio. In Chapter IV, which deals with compensation in cases of indirect expropriation, it is argued that:

Moving from Nouvel’s theory, indeed, Faccio approves the idea that ‘as of today, the value of indemnification for investors is less based on the legality of the expropriation than on the profitability of the expropriated assets’ (own translation).Footnote ⁵ This form of reparation also applies to cases of ‘creeping’ or ‘indirect’ expropriation, which do not involve a formal deprivation of property, but have the effect of substantially depriving the investment of its value.Footnote ⁶ This form of expropriation is addressed in Chapter III, where the author introduces and discusses the well-known distinction between the ‘pure effects approach’ and the ‘police powers doctrine’. According to the former, the presence of an expropriation shall be evaluated looking at the effects of states’ actions only, whereas the latter justifies the measures taken by states with the aim of protecting essential public interests and in this case excludes the existence of an expropriation and consequently the obligation to compensate. Within this ‘all or nothing scenario’, the author also explains that some decisions have resorted to the principle of proportionality as a way of introducing some flexibility in the assessment of indirect expropriation. Hence, the non-recognition of an expropriation (and the consequent lack of compensation) would only be justified when the public interests at stake are so important as to justify a complete sacrifice of the investors’ rights. This approach is the one to which Sondra Faccio’s main points of criticism are directed, as Chapter V clearly shows. According to the author – and this is her main argument – the evaluation of the existence of an expropriation cannot but be based on a mere evaluation of the effects of the states’ regulatory actions. In all cases of deprivation of the investors’ property rights, an (indirect) expropriation, indeed, takes place. On the other hand, this does not mean that, as it was argued in the past, states have always to pay full compensation for the damage caused. As it sometimes happened in the case law of the European Court of Human Rights (ECtHR), it might be possible to use the principle of proportionality in the quantum phase in order to adjust the compensation granted to investors taking into account of the states’ legitimate interests behind the enactment of the expropriatory measures. In Faccio’s approach, the recourse to proportionality justifies a sort of holistic approach in the evaluation of compensation for investors that takes into account all the concrete circumstances, and which shall include the evaluation of:

In light of the above, it is preliminarily worth noting that a book discussing the subject of indemnification in cases of expropriation certainly is to be welcome. This is because this subject is still central in the discussions on expropriation in all investment arbitration cases. In this regard, firstly, the attempt to mitigate the extreme consequences of the sole effects doctrine and of the right to regulate approach is certainly an interesting exercise. Secondly, Sondra Faccio’s effort to focus on the quantum phase of expropriation cases deserves praise, considering that this phase of arbitral proceedings is certainly the less discussed in literature. In this regard, the comparison with the ECtHR approach – which, as Faccio discusses at p. 80 ff., has been on some occasions based on the payment of a compensation which took into account all the concrete circumstances rather than the sole effects of the states’ actions – is certainly a spark to be further explored.

Faccio shows to be perfectly aware of the fact that her approach based on the application of proportionality at the quantum phase – which has at least one antecedent in scholarshipFootnote ⁸ – might attract some criticisms.Footnote ⁹ I do not believe, however, that such an approach may be criticized: it tries to strike a balance among the opposing needs of a system that is still struggling with a legitimacy crisis and, for this simple reason, Faccio’s attempt is to be welcome. Perhaps, some perplexities might raise with regard to the concrete outcomes of the approach proposed in the book. Indeed, in the absence of any clear guidance in international investment treaties on how to assess compensation, it seems that Faccio’s approach would allow arbitrators to be completely free in evaluating the circumstances of the case and to determine the amount of compensation on the basis of their subjective beliefs/understanding of the case.Footnote ¹⁰ This kind of approach – which, more than a form of proportionalityFootnote ¹¹ I would consider as an expression of the principle of reasonableness (i.e. the product of a balancing of the relevant principles and rules in light of the circumstances of concrete cases)Footnote ¹² – does not, in my opinion, deserve criticism. However, such an approach is probably not suitable for a system, such as ISDS, which is subject to severe criticisms, inter alia, exactly in light of the lack of legal certainty and the unforeseeability of outcomes determined by the wavering case law of arbitration tribunals.Footnote ¹³ It is not by chance, indeed, that, as reported in scholarship since 2003, the same ECtHR is applying a more rigid approach (i.e. mainly anchored to the full economic value of the expropriated asset) in the evaluation of the amount of compensation to be paid; such a more rigid approach being justified, in the Court’s arguments, by the often unforeseeable results determined by the approach based on proportionality in the quantum phase.Footnote ¹⁴ Similarly, notwithstanding the fact that, as noted, the application of proportionality at the quantum phase has been proposed in scholarship since 2007,Footnote ¹⁵ investment arbitrators still did not appear particularly fascinated by it,Footnote ¹⁶ while the right to regulate doctrine is acquiring increasing importance (in this regard, it is surprising that the author does not analyse in depth – but merely mentions – important cases such as Philip Morris v. Uruguay Footnote ¹⁷ or Marfin v. Cyprus, where Tribunals spent a lot of words on this doctrine).Footnote ¹⁸

Hence, I would conclude that, while this book takes a precise stance within the debate aimed at the rebalancing of international investment law – and for this simple reason it deserves approval – the proposed approach still has to be verified as to its concrete feasibility. This does not mean, however, that Sondra Faccio’s book does not offer much food for thought. It actually does so, and further pieces of scholarship developing this line of thinking would certainly significantly enrich the debate.