Free Consultant
Arbitration on Expropriation in International Investment
It is a well recognized rule in international law that the property of aliens cannot be taken, whether for public purposes or not, without adequate compensation. Two decades ago, the disputes before the courts and the discussions in academic literature focused mainly on the standard of compensation and measuring of expropriated value. The divergent views of the developed and developing countries raised issues regarding the formation and evolution of customary law. Today, the more positive attitude of countries around the world toward foreign investment and the proliferation of bilateral treaties and other investment agreements requiring prompt, adequate and effective compensation for expropriation of foreign investments have largely deprived that debate of practical significance for foreign investors.
Expropriation in investment arbitration concerns two notions which are
- Each State’s right to exercise sovereignty over its territory meaning of that a State may, in special circumstances, expropriate a foreign investor’s property.
- Each State’s obligation to respect properties belonging to foreigners which means that the expropriation of foreign-held properties will only be lawful if the State’s measure meets certain criteria.
The Conditions for Lawful Expropriation in International Investment Arbitration
As the Siag v Egypt arbitral tribunal explained, “Expropriation in and of itself is not an illegitimate act. It is well-accepted that a State has the right to expropriate foreign-owned property.”However, expropriation is lawful only where certain criteria are met, namely, those provided in the relevant bilateral investment treaty (BIT).
BIT’s generally impose certain conditions for a lawful expropriation which are
- the expropriation must be for a public purpose,
- In accordance with due process,
- Non-discriminatory, and
- Accompanied by prompt and adequate compensation.
For instance, Article 6 of the 2012 U.S. Model Bilateral Investment Treaty provides the following cumulative criteria for a lawful expropriation
“Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization except:
- for a public purpose;
- in a non-discriminatory manner;
- on payment of prompt, adequate, and effective compensation; and
- in accordance with due process of law and Article 5 (Minimum Standard of Treatment)”
The 2007 France-Seychelles BIT (Article 6(2)) prohibits expropriatory measures that are “contrary to a specific commitment” of the host State:
“Neither Contracting Party shall take any measures of expropriation or nationalization or any other measures having the effect of dispossession, direct or indirect, of investors of the other Contracting Party of their investments on its territory and in its maritime area, except in the public interest and provided that these measures are neither discriminatory nor contrary to a specific commitment.”
Thus, under the above BIT, expropriation will be unlawful if it
- is not envisaged for a public purpose;
- is based on a discriminatory act; or
- is contrary to a particular engagement of the host State.
Regarding the requirement of a public purpose, tribunals have held that States must act reasonably vis-à-vis their goals. In Tecmed v. Mexico, the arbitral tribunal noted that “there must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realized by any expropriatory measure”. Likewise, in British Caribbean Bank Limited v. Belize, the tribunal observed that public purpose requires an explanation of how the State’s goal will be fulfilled as seen as “Public purpose requires—at least—that the Respondent set out the public purpose for which the expropriation was undertaken and offer a prima facie explanation of how the acquisition of the particular property was reasonably related to the fulfilment of that purpose.”
As a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.
In EnCana Corporation v. Ecuador, the tribunal refused the claimant’s allegation that the host State’s denial of a tax refund was expropriatory, and it stated that “in the absence of a specific commitment from the host State, the foreign investor has neither the right nor any legitimate expectation that the tax regime will not change, perhaps to its disadvantage, during the period of the investment”.
Under customary international law, the foreign investor must be compensated if the host State expropriates its property (even if the expropriation was not illegal). Most tribunals, ruling on similar requirements, note that States shall, at least, make a good faith offer to the investor prior to the expropriatory measure
Standard of Compensation for Expropriation in Investment Arbitration
The standard of compensation for expropriation is not unanimous. BIT’s typically set forth specific provisions on the standard of compensation, following a formula that requires “prompt, adequate and effective” payment (the Hull formula). Several compensation approaches may be considered “prompt, adequate and effective”, however.
The International Law Commission’s Draft Articles on the Responsibility of States for Internationally Wrongful Acts (the “ILC’s Draft”) provides some guidance as to the standard of compensation in the case of internationally wrongful acts.
In this respect, Article 36(1) of the ILC’s Draft provides that “the State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution.” In commentary No. 22 to Article 36, the ILC’s Draft suggests a “fair market value” methodology for compensation of expropriation as “Compensation reflecting the capital value of property taken or destroyed as the result of an internationally wrongful act is generally assessed on the basis of the “fair market value” of the property lost.”
Some BIT’s also refer to “genuine value”, “market value” or “fair market value”. The Energy Charter Treaty: ECT, for instance, provides that “compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the Investment” (Article 13(1)).
Certain commentators suggest that the fair market value approach may not be suitable in some circumstances, and a certain degree of flexibility should be envisaged. These scholars argue that the exceptions to full compensation may be considered in extraordinary circumstances, such as national programmes, agricultural reforms, in case of war, or in other situations where the full compensation principle may be significantly burdensome to the State.
Reference
Expropriation in Investment Arbitration, International Arbitration International Arbitration Information by Aceris Law LLC.
Expropriation in Investment Arbitration, ACERIS LAW The International Arbitration Law Firm.
International Investment Law: A Changing Landscape A Companion Volume to International Investment Perspectives, OECD
![[THAC] SEO AUG C02 1 1200x628](https://thac.or.th/wp-content/uploads/2024/09/THAC-SEO-AUG-C02-1_1200x628-870x570.jpg)
![[THAC] SEO AUG C01 1 1200x628](https://thac.or.th/wp-content/uploads/2024/09/THAC-SEO-AUG-C01-1_1200x628-870x570.jpg)
