EXPROPRIATION OF

PROPERTY
• Many draft convention were rejected but still efforts were continued
by states to draft effective convention to protect foreigner’s property
especially of foreign investments which proved in Hull rule.
• In order to provide minimum standard of treatment to foreigner, in
1938 correspondence took place between Mexico & US in which they
advocated the Hull Rule which was propounded by Mr. Cordele Hull,
who was then Secretary of U.S.
• The rule highlighted that when expropriation of American property
takes place, the adequate, effective and prompt compensation shall
be given immediately according to the municipal laws of host state.
• The rules of international law governing the expropriation of alien property
have long been of central concern to foreigners in general and to foreign
investors in particular.
• Expropriation is the most severe form of interference with property.
• An expropriation could be both a breach of contract as well as a breach of a
treaty, and, likewise, the manner of the breach may amount to a breach of
the fair and equitable standard of treatment.
• Must be adequate compensation.
• Customary international law ---- territorial sovereignty of the host state and
to protect alien property.
• Treaty Law --- all modern agreements on foreign investment contain specific
provisions covering preconditions for and consequence of expropriation.
 The Right to Expropriate
• Host state’s right to expropriate alien property.
• State practice---- considered this right to be so fundamental that even
modern investment treaties(often entitled agreements ‘ for the
promotion and protection of foreign investment’) respect this position.
• Even clauses in agreements between the host state and the investor that
freeze the applicable law for the period of the agreement( ‘stabilization
clauses’) will not necessarily stand in the way of a lawful expropriation.
• The position is less clear if such an agreement explicitly excludes the
right to expropriate.
• Except in extreme circumstances, an international tribunal will probably
interpret such a clause in a literal manner.
 Three Branches of the Law
• International law on expropriation ---- 3 branches ----
a) The first one defines the ‘investment’ that will be protected .
b) The second branch concerns the definition of an expropriation.
While this matter raises no questions in case of a formal expropriation,
the issue may aquire a high degree of complexity when the host state
interferes with the rights of the foreign owner without a formal taking
of title.
c) The third branch of the law on expropriation relates to the conditions
under which a state may expropriate alien property ----- public
purpose, non-discrimination as well as prompt, adequate, and effective
compensation.
 The Legality of Expropriation

• 4 requirements ----
a) must serve a public purpose.
b) The measure must not be arbitrary and discriminatory within the generally
accepted meaning of the terms.
c) Some treaties ---- requires ---- due process.
d) The expropriation measure must be accompanied by prompt, adequate, and
effective compensation.
• Rule of compensation ----- very controversial one.
• Compensation ----- earlier ---- discussed in the broader context of economic
decolonization, the notion of ‘Permanent Sovereignty over Natural Resources’, and
of the call for a new international economic order.
• Today ---- fair and adequate compensation exists.
• However ----- the amount of compensation is not easy to determine.
• Various methods --- may be used.
• discounted cash flow method --- most appropriate rather than the
book value or replacement value.
• Illegal expropriation ---- never resolved.
• illegal expropriation will fall under the general rules of state
responsibility, while this is not so in the case of a lawful expropriation
accompanied by compensation.
• Compensation for a lawful expropriation should represent the market
value at the time of the taking.
• ‘prompt’ compensation ----- ‘without undue delay’.
• The draft adopted the principle of international law in expropriation
of foreign property stating that there must be a public purpose to
acquire property and as per the due process of law.
• Methanex v. United State
• In Siemens v. Argentina -------- the ICSID held that the date of valuation shall be the
date of award rather than the date of expropriation of foreign property, but this
principle would be applying only in case of unlawful expropriation, but not in lawful
expropriation.
• Compensation in breach of contract is supported in Sapphire International v. National
Iranian Oil Co. it was held that the object of paying compensation is to place the
victim in the same pecuniary position where he was placed before causing damage.
• Compensation for expropriation is a recognised general principle under
international law.
• The sovereign state under international law has authority to acquire foreign property
within its sovereign territory. In the process of acquisition of foreign property, the
state must pay reasonable and adequate compensation.
• International Law Commission (ILC) said payment of compensation is a state’s
responsibility.
 Direct and Indirect Expropriation
• The difference between a direct or formal expropriation and an
indirect expropriation turns on whether the legal title of the owner is
affected by the measure in question.
• Today ---- direct expropriations ---- rare.
• An official act that takes the title of the foreign investor’s property will
attract negative publicity and is likely to do lasting damage to the
state’s reputation as a venue for foreign investments.
• Indirect expropriations------- gained importance. An indirect
expropriation leaves the investor’s title untouched but deprives him
of the possibility to utilize the investment in a meaningful way.
• The definition of indirect expropriation is based on the unbundling of property
rights.
• Although such a notion was known in Roman times and referred to in
England’s philosophical writings, the concept became familiar with the
jurisprudence on the takeover of property in the case law of the United States.
(Penn Central Transportation Co v. New York City)
• Gudmundson v. Iceland ------ held ----- Though taxation is included in the lists
of indirect expropriation, it will be difficult to maintain that taxation involves
expropriation.
• Indirect expropriation involves :-
a) The economic impact of the government action.
b) the extent to which the government action interferes with distinct,
reasonable investment-backed expectations; and
c) the character of the government action.
• The contours of an indirect expropriation definition are not drawn
exactly.
• A growing number of arbitral cases and a growing body of literature
have shed some light on the matter.
• In some recent ICSID decisions, tribunals have interpreted the concept
of indirect expropriation narrowly and have preferred to find
violation of the standard of fair and equitable treatment.
• The concept of indirect expropriation as such was clearly recognized in
the early case law of tribunals and of the Permanent Court of
International Justice in the 1920s and 1930s.
• Today it is generally accepted that certain types of measures affecting
foreign property will be considered an expropriation, and require
compensation, even though the owner retains the formal titles.
• The Abs-Shawcross Draft Convention on Investment Abroad(1959)
referred to ‘ measures against nationals of another Party to deprive
them directly or indirectly of their property…..’
• The same wording appears in the draft Convention on Foreign
Property Protection of the OECD in 1967.
• The 1992 World Bank Guidelines on the Treatment of Foreign Direct
Investment speaks of expropriation or ‘….measures which have
similar effects’.
• The interpretation is included in the 1992 NAFTA, which refers to “a
measure comparable to nationalization or expropriation.”
• Most current bilateral investment treaties contain similar language.
• The new French Model Treaty states ---- “None of the Contracting
Parties shall take any steps of expropriation or nationalization or any
other measures resulting from the dispossession, directly or indirectly,
of citizens or companies of the other Contracting Party....”
• Harvard Professors Sohn and Baxter included in their 1961 Draft
Convention on the International Responsibility of States for Injuries to
Aliens, a version that is elaborate and contains specific categories of
indirect takings:
‘A taking of property includes not only an outright taking of property
but also any such unreasonable interference with the use, enjoyment,
or disposal of property as to justify an inference that the owner thereof
will not be able to use, enjoy, or dispose of the property within a
reasonable period of time after the inception of such interference’.
 Cases of Indirect Expropriation
• The Oscar Chinn Case,1934 PCIJ ------ concerned the interests of a
British shipping business in the Cargo. In the aftermath of the
economic crisis of 1929,Belgian government had intervened in the
shipping business on the Congo River by reducing the prices charged
by Mr. Chinn’s only competitor, the partly state-owned company
UNATRA. The government had also granted corresponding subsidies
to UNATRA in order to keep the transport system on the Congo River
viable.
• Metalclad v Mexico,2000 ----- A US company had been granted a
permit for the development and operation of a hazardous waste
landfill by the Mexican Federal Government.
 Subsequently, the local municipal authorities refused to grant the
necessary construction permit and the regional government declared
the land in question a national area for the protection of cactuses.
Held ----- a violation of NAFTA Article 1110,which provides that ‘no
Party may directly or indirectly nationalize or expropriate an investment
of an investor of another Party in its territory or take a measure
tantamount to nationalization or expropriation of such an investment.
 Effect or Intention of Indirect
Expropriation
• The effect of the measure upon the economic benefit and value as well as
upon the control over the investment will be the key question when it
comes to deciding whether an indirect expropriation has taken place.
• Whenever this effect is substantial and lasts for a significant period of time,
it will be assumed prima facie that a taking of the property has occurred.
• In RFCC v Morocco (2003) the tribunal stated that an indirect
expropriation exists in case the measures have ‘substantial effects of an
intensity that reduces and/or removes the legitimate benefits related with
the use of the rights targeted by the measure to an extent that they render
their further possession useless.
• In Telenor v Hungray (2006) --- held ---- in order to constitute an
expropriation, the conduct complained of must have a major adverse
impact on the economic value of the investment.
In Tecmed v Mexico (2003) ---- the tribunal found that there had been
an indirect expropriation. After explaining the concept of indirect or de
facto expropriation, the tribunal said:
‘The government’s intention is less important than the effects of the
measures on the owner of the assets or an the benefits arising from
such assets affected by the measures; and the form of the deprivation
measure is less important than its actual effects.’
In Starret Housing v Iran (1983) ----- held ----- :
‘….it is recognized in international law that measures taken by a State
can interfere with property rights to such an extent that these rights
are rendered so useless that they must be deemed to have been
expropriated, even though the State does not purport to have
expropriated them and the legal title to the property formally remains
with the original owner.’
 Legitimate Expectation
• Increasing attention is the existence of legitimate expectations on the part of
the investor.
• Legitimate expectations play a key role in the interpretation of fair and
equitable treatment standard. But they have also found entry into the law
governing indirect expropriation.
• Legitimate expectations may be created not only by explicit undertakings on
the part of the host state in contracts but also by undertakings of a more
general kind.
• In particular, the legal framework provided by the host state will be an
important source of expectations on the part of the investor. What matters for
the investor’s expectations is the state of the law of the host country at the
time of the investment.
• Tribunals have relied on the legitimate expectations of investors in a
number of cases relating to indirect expropriation.
• Revere Copper v OPIC ( 1978) ---- held --- exists legitimate expectation.
In Thunderbird v Mexico (2006) the tribunal gave a general definition of
legitimate expectations --------
‘Having considered recent investment case law and the good faith
principle of international customary law, the concept of ‘legitimate
expectations’ rel;ates,within the context of the NAFTA framework, to a
situation where a Contracting Party’s conduct creates reasonable and
justifiable expectations on the part of an investor(or investment) to act in
reliance on said conduct, such that a failure by the NAFTA Party to
honour expectations could cause the investor(or investment) to suffer
damages’.
• Azurix v Argentina ( 2006) ---- held ---- The tribunal discussed the
issue of legitimate expectations at some length. It held that
expectations ‘are not necessarily based on a contract but on
assurances explicit or implicit, or on representations made by the
State which the investor took into account in making the investment’.
On the basis it found that Argentina had created ‘reasonable
expectations’ that it had not lived up to. Tribunal ---- also held that no
indirect expropriation had taken place, since the investor had continued
to exercise control over the investment.
 Duration of Measure of Expropriation
• The duration of a governmental measure affecting the interests of a
foreign investor is important for the assessment of whether an
expropriation has occurred.
• Creeping Expropriation :-
An expropriation which may occur ‘outright or in stages'. Thus, the
term ‘creeping expropriation’ describes a taking through a series of
acts.
In this sense, a report by UNCTAD referred to “... a slow and
systematic violation of one or more of a foreign investor's
ownership rights, which reduces the value of his investment.”
• The Tribunal in ----- Generation Ukraine v Ukraine ( 2005) explained
creeping expropriation as follows:
“Creeping expropriation is a form of indirect expropriation with a
distinctive temporal quality in the sense that it encapsulates the
situation whereby a series of acts attributable to the State over a
period of time culminate in the expropriatory taking of such property.
A plea of creeping expropriation must proceed on the basis that the
investment existed at a particular point in time and that subsequent
acts attributable to the State have eroded the investor’s rights to its
investment to an extent that is violative of the relevant international
standard of protection against expropriation”.
• In Siemens v Argentina (2007), the host state had taken a series of
adverse measures, including postponements and suspensions of the
investor’s profitable activities, fruitless renegotiations and ultimately
the cancellation of the project. The tribunal found that this had
amounted to an expropriation and described creeping expropriation
in the following terms:----
“By definition, creeping expropriation refers to a process, to
steps that eventually have the effect of an expropriation. If the
process stops before it reaches that point, then expropriation would
not occur. This does not necessarily mean that no adverse effects
would have occurred. Obviously, each step must have an adverse
effect but by itself may not be significant or considered an illegal act.”
 POLITICAL RISK INSURANCE
• Risk for investor ----- in investment projects ---- led ---- market for
investment insurance schemes.
• 1st phase of insurance programmes ---- 1950s --- and was dominated by
insurers run by national governments.
• In the U.S. ---- the Agency For International Development carried out the
task until the Overseas Private Investment Corpotation ( OPIC) took over in
1971.
• 1970s ----- private insurers ---- market starting with Lloyd’s in London, and
the American International Group (AIG) in New York.
• In 1985 ---- member states of the World Bank ---- estb. An imp.
Organisation ---- the Multilateral Investment Guarantee Agency ( MIGA).
• At regional level ----- the International Arab
Development Bank ---- charged primarily with the
underwriting of investment insurance.
• Private companies ---- entered investment insurance
market on the assumption of high efficiency and
acceptable margin of profit. Example :- Marine
insurance.
• It has been the general practice of govt. insurers to conclude agreements with
host countries that provide for subrogation.
• Investor’s rights against the host country ---- assigned to insurer upon payment
under the insurance contract.
• Countries like Germany include clauses to this effect in BITs, whereas ,
countries like U.S. concludes specific agreements .
• Germany --- governmental insurance will only be granted for investments in
countries that have concluded a Bit with Germany or in which a similar degree
of legal protection prevails.
• Art. 11(a) (ii) of MIGA Convention ----- Protection of non – compliance with
contracts , repudiation or breach is covered by MIGA if the holder of the
guarantee doesnot have access to a judicial and arbitral forum. Non – payment
of an obligation under an arbitral award may constitute an expropriation as
covered under international law, and as covered by an insurance contract even
if the host country considers that it is not able to pay the amount due under
the arbitral award.
• Authority of arbitral awards ---- under insurance contracts to disputes
between states and foreign investors --- depend ---- if the provisions
in insurance contracts and the standards of protection in the treaties
and customary international law are same.