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Lecture 5 - Expropriation 2

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Lecture 5 - Expropriation 2

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LECTURE 5

EXPROPRIATION
Introduction
Protection from expropriation of
foreign property under customary
international law – prompt, adequate
and effective compensation to be paid.
Protection from expropriation of
foreign property under treaty law –
e.g. BITs
The right of states to expropriate as
part of the expression of state
sovereignty – lawful expropriation
Introduction
The rise in expropriation claims
against states conditioned by:
i. Rise in BITs/IIAs that protect
investor’s rights
ii. Increase in state intervention in the
running of the economy
iii. State regulatory intervention in the
public interest
Legality of Expropriation
Public purpose
ADC v. Hungary:“… a treaty requirement for
‘public interest’ requires some genuine interest
of the public. If mere reference to ‘public
interest’ can magically put such interest into
existence and therefore satisfy this
requirement, then this requirement would be
rendered meaningless since the Tribunal can
imagine no situation where this requirement
would not have been met.”
Siag and Vecchi v. Egypt: delayed use of land
for public purpose.
Legality of Expropriation

Non-discrimination
Due process of law
Prompt (without undue delay),
adequate (fair market value) and
effective compensation (payment in a
convertible currency)
Implications of Lawful and Unlawful
Expropriation
Lawful expropriation – payment of
compensation based on market value
Unlawful expropriation – restoration of
situation that would have existed had the
unlawful act not taken place – this is
determined through arbitration (payment of
damages/lost profits)
Difference between compensation paid for
lawful expropriation and damages for
unlawful unlawful expropriation hinges on the
Direct Taking / Expropriation –
where there is a “mandatory legal transfer of
title to the property or its outright physical
seizure”
(UNCTAD, Expropriation: A Sequel, UNCTAD
Series on Issues in International Investment
Agreements II, Geneva: United Nations, (2012),
p.6)
Open, deliberate, and unequivocal intent to
take property (e.g. formally expressed in a
law or decree)
Large scale expropriations i.e.
nationalizations – e.g. the Libyan
Indirect Expropriation
A measure which though is not a direct
taking, results in a permanent destruction
of the economic value of an investment or a
deprivation of management, use or control
of the investment in a meaningful way.
Economic impact is equivalent to direct
expropriation – total or near-total
deprivation
Payment of compensation only arises when
an arbitral tribunal establishes
expropriation.
Recognition of the indirect expropriation under
international law
“it is recognized under 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.” Starrett Housing v. Iran,
Interlocutory Award No. ITL 32-24-1, 19
December 1983, 4 Iran-United States Claims
Article 7 of Ghana-UK BIT

(I) Investments of nationals or companies of either Contracting Party shall


not be nationalised, expropriated or subjected to measures having effect
equivalent to nationalisation or expropriation (hereinafter referred to as
"expropriation") in the territory of the other Contracting Party, except
where for a public purpose related to its internal needs, a Contracting
Party expropriates the investments of nationals or companies of the other
Contracting Party, the following conditions shall be complied with:
(a) The measures shall be accompanied by provision for the payment of
compensation amounting to the full and genuine value of the investment
expropriated immediately before the expropriation or before the impending
expropriation became public knowledge whichever is the earlier.
(b) The compensation shall be effectively realizable and freely transferable.
(c) The compensation shall be paid without undue delay. If the
compensation is not paid within six months, it shall after that date attract
interest at the normal commercial rate until the date of payment.
Recognition of the indirect
expropriation under BITS
Egypt-Germany BIT (2005) Article 4.
Expropriation
“[…] 2) Investments by investors of either
Contracting State shall not directly or
indirectly be expropriated, nationalized
or subjected to any other measures the
effects of which would be tantamount to
expropriation or nationalization in the
territory of the other Contracting State
except for the public benefit and against
Recognition of the indirect expropriation
under BITS
Mexico-United Kingdom BIT (2006) Article 7.
Expropriation “Investments of investors of either
Contracting Party shall not be nationalized or
expropriated, either directly or indirectly through
measures having effect equivalent to
nationalization or expropriation
(“expropriation”) in the territory of the other
Contracting Party except for a public purpose, on
a nondiscriminatory basis, in accordance with
due process of law and against compensation….”
Non-Discriminatory Regulatory
Measures
Regulatory acts by States undertaken in the
public interest that may have effects akin to
indirect expropriation.
Non-compensable
Act taken in public interest, e.g.
environmental protection, public health
and safety
Non-discriminatory in nature
Adherence to due process
Non-Discriminatory Regulatory
Measures
Too v Greater Modesto Insurance Associates:
A state is not responsible for loss of property
or for other economic disadvantage resulting
from bona fide general taxation or any other
such action that is commonly accepted as
within the police power of States, provided it
is not discriminatory and it is not designed
to cause the alien to abandon the property to
the State or to sell it at a distress price.
Importance of the Definition of Investment in
Determining Expropriation
1. Economic right capable of economic
exploitation independently
2. Individual asset
3. Entire business or enterprise
4. EnCana v Ecuador – refusal of Ecuador to give
VAT refunds due under Ecuadorian law was
deemed to be expropriatory due to the
definition of investment under the Canada –
Ecuador BIT. The definition of investment
included “claims to money” and “returns”
5. Amoco v Iran “expropriation … may be
any right which can be the object of a
commercial transaction, i.e. freely sold
and bought, and thus has a monetary
value”.
6. Intangible property – e.g. Intellectual
property, the right to manage, or
contractual rights – Phillips Petroleum
Co. Iran v Iran – there is the obligation to
compensate “whether the property is
tangible, such as real estate, or
7. BITS that cover expropriation of domestic
company in which a foreign investor holds
shares – e.g. Article 5(5) of the Ethiopia-Spain
BIT (2006) - “Where a Contracting Party
expropriates the assets of a company which is
incorporated or constituted under the law in
force in any part of its own territory, and in
which investors of the other Contracting
Party own shares, it shall ensure that the
provisions of this Article are applied so as to
guarantee prompt, adequate and effective
compensation in respect of their investments
to such investors of the other Contracting
Types of Expropriation

Creeping Expropriation - Generation Ukraine v. Ukraine


“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”.
Regulatory expropriation - Suez v. Argentina “In case of
an indirect expropriation, sometimes referred to as a
‘regulatory taking,’ host States invoke their legislative and
regulatory powers to enact measures that reduce the
benefits investors derive from their investments but without
actually changing or cancelling investors’ legal title to their
assets or diminishing their control over them.”
Expropriation of Contractual Rights: e.g. a right based on a
commercial transaction.
Waste Management v. Mexico : “The mere non-performance of a
contractual obligation is not to be equated with a taking of
property, nor (unless accompanied by other elements) is it
tantamount to expropriation…. [T]he normal response by an
investor faced with a breach of contract by its governmental
counter-party (the breach not taking the form of an exercise
of governmental prerogative, such as a legislative decree) is
to sue in the appropriate court to remedy the breach. It is only
where such access is legally or practically foreclosed that the
breach could amount to a definitive denial of the right (i.e., the
effective taking of the chose in action) and the protection of Article
1110 [‘Expropriation’] be called into play.”
Chose in action – The right to bring a lawsuit to recover property,
money, or a debt

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