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Disputes Direct Expropriation

Info: 5459 words (22 pages) Law Essay
Published: 2nd Jul 2019

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Jurisdiction(s): International Law


Disputes on direct expropriation have been replaced by disputes related to foreign investment regulation and indirect expropriation. There is increasing concern that concepts such as indirect expropriation may be applicable to regulatory measures aimed at protecting the environment, health and other welfare interests of society.

It is true that the right of foreign investors to the protection of their investment often conflicts with the right of states to regulate within their boundaries.

The single most important development in state practice has become the issue of indirect expropriation. In this period of globalization, decreased official development aid and increased privatization and liberalization, formal expropriation has become anathema for developing state. The former concepts of economic decolonization and permanent sovereignty over natural resources have, in theory or in practice, been replaced by structural adjustment, good governance, export-led growth and vivid competition for foreign investment. The economic focus on private property notwithstanding, the need to protect certain public goods, such as a rate of economic adjustment which allows socially acceptable adaptation in area like employment and fiscal austerity, has remained, in varying degrees, on the political agenda of democracies in which political actors are held accountable and are elected within short legislative periods. The effect of global neoliberalism on the environment has been the subject of an open debate concerning the interplay between the hash consequences of life-threatening poverty, respect for the environment, the size of the public budget to afford environmentally benign action, and the growing concern of the general public for environmental policies in countries with increasing income. These competing concerns are to be assessed in the context of diminishing non-renewable natural resources and the spreading of methods of production and consumption that place additional stress on environmental system.


Consistent with the notion of territorial sovereignty, the classical rules of international law have accepted the host state’s right to expropriate alien property in principle since a foreign investor operates within the territory of a host state; the investor and its property are subject to the legislative and administrative control of the sovereign state. There is no doubt that each state has the right to set its own rules of property which foreigner accepts when investing. Changes in internal policies of the political and economic conditions in host country could be brought about by several factors, such as; the exploitative nature of the business of the investor which may bring about the dreadful conditions of the local environment or public health, a change of government, political revolution, economic nationalism, or monetary crisis. As a result of these, the pressures will be put on the national government to protect or rearrange public benefit which may rise to the taking of property of a foreign investor.

For example, the sovereignty of a nation extends to its national resources. In most countries such resources are owned by the public and administrated by government. Public ownership necessarily implies that such resources will be developed in the public interest and for the public citizens of the nation.

United Nations declaration on the establishment of a new international economic order

the new international economic order should be founded on full respect for the following principles:

Sovereign equality of the states, self-determination of all peoples, inadmissibility of the acquisition of territories by force, territorial integrity and non-interference in the internal affairs of other states;

The right of every country to adopt the economic and social system that it deems the most appropriate for its own development and not to be subjected to discrimination of any kind as a result;

Full permanent sovereignty of every state over its natural resources and all economic activities. In order to safeguard these resources, each states is entitled to exercised effective control over them and their exploitation with means suitable to its own situation, including the right to nationalization or transfer of ownership to its nationals, this right being an expression of the full permanent sovereignty of the state. No state may be subjected to economic, political or any other type of coercion to prevent the free and full exercise of this inalienable right;

The right of all states, territories and peoples under foreign occupation, alien and colonial domination or apartheid to restitution and full compensation for the exploitation and depletion of, and damages to, the natural resources and all other resources of those states, territories and peoples;

The relevant principles for the purposes of the European Convention of Human Rights are included in Article

1 of Protocol 1. Though this article does not say so explicitly, it strongly implies that the duty to compensate is not applicable to normal regulation.

Every natural or legal person is entitled to the peaceful enjoyment of its possessions. No one should be deprived of his possessions except in the public interest and subject to the conditions provided for by the law and by the general principles of international law.

The proceedings provisions shall not, however, in any way impair the right of the state to enforce such law as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.


As regard to the legislative power flowed from the state sovereignty, the host state is able to change any event that took place within its territory or to affect any contractual right or right to property that is located within its territory, thus it is clear from this basis that the foreign company stands a disadvantage in any agreement it made with the host state. One of the method which limits the state sovereignty in contractual relations with foreign investor is to adopt a so called ‘stabilization clause’ in international investment contracts. This invokes the classical doctrine of ‘sanctity of contract’ as the state is bound by agreement contained in the clause not to apply any later changes to its law in particular contract or to alter the term of the contract directly by legislation. This clause also intended to immunize the foreign investment contract from a range of matter such as taxation, environmental control, and other regulations as well as to ensure that the contract would be operative for the full term provided in the contract. However, this area of law has never been fully clarified. One view is that these clauses may exclude any subsequent changes of host state law from operating upon the investment contracts. In other words, any amendments of law applicable to the investment contracts will be in violation of stabilization clause. Thus the original terms of the investment agreement at the time of entry of foreign investor are frozen from subsequent legal changes. On the other hand, an alternative view in favor of the sovereignty of the host state is that any changes of the law is permitted since the host state must act in public benefit but the host state will be accompanied by a duty to compensate the foreign company. Consequently, doubts have been raised as to whether the stabilization clause may not be able to achieve what is set out to do and the investor may not be protected against legislative uncertainty.

This controversial issue is further illustrated by the three arbitrations initiated by BP , Texaco and Liamco against expropriatory actions taken by Libya. In all three cases, the stabilization clause involved in the concession contracts was designed to protect them against regulatory changes. In the Texaco award, the effect of stabilization clause in an oil concession agreement between a US oil company and the government of Libya was to limit the state’s sovereignty in relation to its rights over natural resources for the limited period of concession. Therefore the tribunal decided that the government could not exercise its sovereignty to nationalize in violation of its specific contractual commitments in stabilization clauses, and the nationalization in the face of the stabilization clause amounted to a breach of the deeds of concession. However, the Liamco decision is somewhat confusing and considerably different from the Texaco decision. In the Liamco award, a stabilization clause will not affect the sovereign right to expropriate or nationalize which this violation of a contract is not unlawful under international law and the principle of pacta sunt servanda was qualified by the right of the state to expropriate subject to the obligation of compensation.

Likewise, he Aminoil arbitration concerned an expropriation dispute between a US oil production company and Kuwait. The tribunal found that its stabilization clause was valid and binding the government of Kuwait but that typical clause should not be presumed to imply that the host state lost the right to expropriate. The tribunal added that in the absence of the stabilization clause of this investment contract, the host state was not prevented from granting stability guarantees by contract but the tribunal required an express provision restricting the host state’s power of expropriation. Therefore, the Kuwait’s 1977 decree terminating the concession and expropriating Aminoil’s assets did not violate the stabilization clause of the original agreement and Aminoil was entitled only compensation for a lawful taking of its property interest. As a result of this case, it appears from the tribunal reasoning that the stabilization clause could not effectively restrict the host state’s legislative power.

As far as the absolute sovereignty of the host state particularly where the exercise of such power is subject to public good is concerned, it can be seen that the stabilization clause may not effectively serve its protective character to the foreign investor. The modern consequence of the classic stabilization clause aimed at prohibiting an expropriation is not to invalidate nationalization but to make it unlawful which in turn affects the amount of compensation. Dolzer and S’chreuer also commented that even clauses in agreements in the host state and the investor that freeze the applicable law for the period of agreement in international investment contracts will not necessarily stand in the way of a lawful expropriation. Moreover, according to Sornarajah, stabilization clause may not be possible in any case for the state to fetter its legislative power by contract made with private party as this may be unconstitutional.


As mentioned above, it is recognized that the state has a right to control property and economic resources within its territory to develop its economic, political or other objectives. Such state measure must be accepted that the taking of property is prima facie a lawful exercise of powers of government. However, it is generally accepted that an expropriation is lawful if it satisfies certain conditions. According to the settled practice of what constitute a lawful expropriation, though terminology varies, it is conditioned on three or four requirements which normally contained in almost all treaties and also seen to be part of customary international law. For example these requirements are stated in American law institute restatement (third) of the foreign relations law of the United States:

Article 712(1): Economic Injury to National of Other States

A taking by the state of the property of a national of another state that is (a) not for a public purpose, or (b) discriminatory, or (c) not accompanied by provision for just compensation; for compensation to be just under this subsection, it must, in the absence of exceptional circumstances, be in an amount equivalent to the value of property taken, be paid at the time of taking, or with in reasonable time thereafter with interest from the date of taking, and in a form economically usable by the foreign national;

Another good example is Article 1110(1) of The North America Free Trade Agreement (NAFTA) with the following language;

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 (‘expropriation’), except:

for a public purpose;

(a) on a non-discriminatory basis;

(b) in accordance with due process of law; and

(c) on payment of compensation

2.1) Public Purpose

The measure should be served a clear and genuine public purpose not for the purpose of private gain. This concept of ‘public utility’ or ‘public use’ or ‘dominant public purpose’ is widely recognized and it is also embodied in the constitution of a number of countries as a justification of the taking of private property. For example, the state exercises its power of national economic policy in order to serve the enrichment of country. Moreover, where a taking is by way of reprisal against the act of home state of foreign national or if the property is seized in the course of committing crime against human right, it is considered illegal on the ground that it lacks public interest. Equally, where the taking is motivated by political concerns that are not directly relevant to the state’s economic policy, and is not justified by exceptional circumstances, it may be unlawful.

As far as the practice and the application whether the government measures are motivated by public purpose are concerned, there is little doubt that the requirement will be used as necessary for lawful expropriation but it is unlikely that it will constitute more than a subsidiary, throwaway argument for illegality. This view is reflected in the commentary of the American Law Institute’s Restatement on Foreign Relation Law. The commentary reads:

The requirement that a taking be for a public purpose is reiterated in most formulations of the rules of international law on expropriations of foreign property. That limitation, however, has not figured prominently in international claims practice, perhaps because the concept of public purpose is broad and not subject to effective re-examination by other states. Presumably, a seizure by a director or oligarchy for private use could be challenged under this rule.

In the Liamco award, arbitrator dismissed the argument based on the requirement of a public purpose in the following terms:

As to the contention that the said measures were politically motivated and not in pursuance of a legitimate public purpose, it is the general opinion in international theory that the public utility principle is not a necessary requisite for the legality of nationalization. This principle was mentioned by Grotius and other publicists, but now there is no international authority, from a judicial and other source, to support its application to nationalization. Motives are different in international law, each state being free to judge itself what it considers useful or necessary for the public good. […] The objective pursued by it is of no concern to third party.

2.2) Non-Discrimination

The government measure should not discriminatory and arbitrary as it is unlawful under international law. By tradition, the requirement relating to the absence of discrimination was directly against racial discrimination of aliens on the basis of national or ethnic origin. Where the taking is ethnically motivated, it is clearly violative of the ius cogens norm against racial discrimination and hence illegal. However in modern practice, as the issue of regulatory takings becomes prominent, any taking that is pursuant to discriminatory or arbitrary action, or any action that is without legitimate justification, is considered to be contrary to the non-discrimination requirement, even absent any singling-out on the basis of nationality. Moreover, the non-discrimination requirement demands the governmental measures, procedures and practices are non-discriminatory even in the treatment of members of the same group of aliens. The issue of discrimination involves a comparison with the treatment afforded to domestic competitors, to other foreign investors in general. The basis principle of equality of treatment is in this issue. Thus any difference in treatment must objectively justifiable. In this respect, discriminatory treatment, that cannot be justified by reference to the host state’s economic policy, has been presumed to be illegitimate.

2.3) Compensation

Compensation should be paid. As regards to this, it is also accepted in principle but there is no universal agreement relating to the manner of assessment of the due compensation. The more recent bilateral investment treaties (BITs) use the formula that payment should be prompt, adequate and effective compensation but other alternative formulas, such as just compensation are also be used.

Concerning the standard of compensation, the effect of the discrepancy of opinion iuris between the capital-exporting countries and the developing countries, as well as the significant of heterogeneous state practice not necessarily identical with any specific opinion iuris, raised issues regarding the formation and evolution of customary law in a setting of divergent opinions and practice.

2.4) Due process

Due process is an emerging trend in international investment agreement (IIAs) that deserves attention in the development of fourth requirement. an expression of the minimum standard under customary international law and of the requirement of fair and equitable treatment. Therefore it is not clear weather such a clause, in the context of the rule on expropriation, adds an independent requirement for the legality of the expropriation.

There is general agreement that a taking which lack a public purpose and discriminatory are illegal in international law.

Modern international law may give a certain margin of discretion to the host state in this area. However, it is not entirely clear whether this margin should be the same in all cases. Arbitral jurisprudence has mainly dealt with differences of treatment between foreign corporations processing the same or different nationalities. More problematic is the case of differing unfavorable to the foreign entity. Such treatment may violate the ‘national treatment’ standard which is presented in a number of bilateral investment treaties.

Another point of uncertainty is how …

In Feldman v Mexico, the arbitral tribunal held that ‘the conditions (other than the requirement for compensation) according to the NAFTA context are not of major important in determining expropriation’. It explained that:

In the tribunal’s view, the essential determination is whether the actions of the government constitute an expropriation or nationalization, or are valid governmental activity. If there is no expropriatory action, factor a-d are of limited relevance, except to the extent that they have helped to differentiate between governmental acts that are expropriation and those that are not, or are parallel to violations of NAFTA Article 1102 and 1105. If there is a finding of expropriation, compensation is required, even if the taking is for public purpose, non-discriminatory and in accordance with due process of law and Article 1105(1).


Protection against indirect expropriation has been included in various forms of international instruments. However, it is difficult to define with precision the situations covered by the concept since most of them stay mute on the features of the measure. It is not unreasonable to assume that the legal issues in the foreign investment context may be dominated by the definition of expropriation.

The starting point for interpreting general clauses intended to identify takings in international law is similar to the approach taken for interpreting broad principles in the jurisprudence of national courts, both in the interpretation of their constitutional rules protecting property and in allowing the exercise of legislative sovereignty in economic affairs. In past decades, various efforts have been made by prominent institutes and authors to summarize or codify the state of international law as it has evolved.

In order to provide clear guidance on the subject of expropriations, lessens should be learned regarding both the substantive……


At this point it seems appropriate to add an observation with regard to terminology. The term ‘expropriation’ and ‘taking’, in the view of Reinisch, are interchangeable.

A distinction between the two terms is that nationalization involves a taking of foreign owned assets into state or public ownership, and often takes place in large-scale economic sectors whereas an expropriation would seem to have a broader scope in the sense that it does not necessarily imply the ownership has taken by the state, but instead that a deprivation has occurred because of an action taken by the state. As Higgins stated that;

Expropriation may affect an entire industry or individuals. Nationalization by contrast entails large-scale takings by virtue of a legislative or executive act for the purpose of transferring the interest into public-sector use.

The more general term ‘taking’ may be used to cover both cases.


Certain steps in that direction have been taken in some legal texts attempted by individuals or institutions.

As early as 1961, the so called Harvard Draft Convention on the International Responsibility of States for injuries to Aliens by Professors Sohn and Baxter set the tone for defining expropriation or the taking of foreign private property in the following words:

(a) A ‘taking of property’ includes not only an outright taking of property but also any such unreasonable interference, use, enjoyment, or disposal of property as to justify an interference that the owner thereof will not be able to use, enjoy, or dispose of the property with in a reasonable period of time after the inception of such interference.

(b) A ‘taking of the use of property’ includes not only an outright taking of property but also an unreasonable interference with the use or enjoyment of property for a limited period of time.

In the 1967 OEDC Draft Convention on the Protection of Foreign Property, an expropriatory act was defined as a measure that:

no party shall take any measure depriving, directly or indirectly, of his property a national of another party.

[…] as to deprive ultimately the alien of the enjoyment or value of his property, without any specific act being identifiable as out right deprivation. As instances may be quoted excessive or arbitrary taxation; prohibition of dividend distribution coupled with compulsory loans; imposition of administrators; prohibition of dismissal of staff; refusal of access to raw materials or of essential export or import licences.

The provisions on expropriation are quite common on investment treaties but their definitions appearing in the treaties are of such generality since they provide merely general reference to the term expropriation to parties or arbitral tribunals confronted by specific cases. Moreover, there is a visible reluctance to include a definition of expropriation in treaties. As Dolzer pointed out that;

The current version of investment treaties do not in any way illuminate the issue of indirect expropriations; they rather state the problem, and presumably the rule of general international law are meant to provide the solution. […] Such apparent reluctance to attempt a definition of ‘expropriation’ in the BITs may be explained by the fact that a host state, as is well known, can take a number of measures which have a similar effect to expropriation or nationalization, although they do not de jure constitute an act of expropriation, such measures are generally termed ‘indirect’, ‘creeping’ or ‘de facto’ expropriation.

A good example on a broad definition of indirect expropriation of the international level is Article 1110(1) of The North America Free Trade Agreement (NAFTA) with the following language;

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 (‘expropriation’), except:

for a public purpose;

(a) on a non-discriminatory basis;

(b) in accordance with due process of law; and

(c) on payment of compensation

It is clear in NAFTA that ‘expropriation’ is explained by reference to the verbs ‘expropriate’ and ‘nationalize’, though no indication is given as to the meaning of these words. It rather states the rule of general international law to provide the solution. Inclusion of both terms at least suggests a broad range of action to be proscribed, as does the express inclusion of words ‘directly or indirectly’ and the additional provision ‘or take a measure tantamount’. However there is no specific guidance in the instrument as to what constitutes direct as opposed to indirect expropriation, and how a ‘measure tantamount to nationalization’ differs from direct or indirect nationalization.

In the NAFTA context, the lack of institutionalized permanent tribunal and the absence of a NAFTA-wide nullification procedure have contributed to considerable jurisprudential heterogeneity presumably unsustainable in the long run. The effect has been to create additional incentives to bring law suits in hope of clarifying the state of law.

The language of Article 1110 on expropriation was expressed in the influential arbitral tribunal in Metalclad. After citing Article 1110 of NAFTA, the tribunal found a violation of this Article. The tribunal stated:

expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host state, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be expected economic benefit of property even if not necessarily to the obvious benefit of the host state.

This determination by the Metalclad arbitral decision is not with out controversy as to whether the Metalclad definition of expropriation is too broad for the purpose of Article 1110 to be reliable on its expansive nature of formulation as stated in the Supreme Court of British Columbia that:

The tribunal gave an extremely broad definition of expropriation for the purposes of Article 1110. In addition to the more conventional notion of expropriation involving a taking of property, the tribunal held that expropriation under the NAFTA includes covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property. This definition is sufficient broad to include a legitimate rezoning of property by a municipality or other zoning authority.

Additionally, the Metalclad definition deserves to be quoted not just because it reflects a recent broad effort to state the law, but also because it highlights a distinct line of thinking. Remarkably, the award laid down its definition without reference to any previous decision or codificatory norm, focusing strongly and exclusively on the effect of governmental measure on the alien owner.

The 1994 Energy Charter Treaty in its Article 13 provides that:

Investment or Investors of A contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation except where such Expropriation is:

(a) for a purpose which is in the public interest;

(b) not discriminatory;

(c) carried out under due process of law; and

(d) accompanied but the payment of prompt, adequate and effective compensation.

Unfortunately, the ECT contains some elements of ambiguity which had been carried over from the NAFTA model.


As regards to bilateral investment treaties, it is standard for modern BITs to contain an expropriation provisions to protect foreign investors from expropriatory actions as to maintain a vital purpose of BITs. However, such provisions usually do not provide anymore guidance to the parties (and arbitrators) than the multilateral investment discussed above.

The BITs generation appreciate that the foreign investment may be expropriated indirectly through ‘measures tantamount to expropriation or nationalization’, ‘measures having effect equivalent to nationalization and expropriation’, or ‘measure having similar effect’ in order to capture forms of indirect expropriation. This phase generally found in substance in almost all BITs. For example……. of ‘indirect’ expropriation. It can be seen as the innovation solution as a more realistic design in determining what constitute in direct expropriation. Essentially, the proposal of definition is to be broad and flexible since any measures regardless of forms which have the effect of depriving an investor of his management, control or economic value in a business may constitute an expropriation requiring compensation as Professor Reisman and RD Sloane have pointed out that:

This phase includes not only intentional and obvious indirect expropriation, nor only intentional creeping expropriation, but also a frequent form of taking in prior generation. It also captures the multiplicity of inappropriate regulatory acts, omissions, and other deleterious conduct that undermines vital normative framework created and maintained by BITs and by which government can, in effect but not name, now be deemed to have expropriated a foreign investment.

Arguably, such a wide definition of taking may not be acceptable in general international law for the reason that many normal activities of states, such as taxation, affect property rights cannot ordinarily be expected to give rise to claim of expropriation or scrutiny by international tribunals. As a consequence, it is difficult to assess whether an international arbitral tribunal would actually set a lower barrier to recovery for the investor claimant based on the notion that the investor had only to show some deprivation as opposed to a substantial deprivation since the absence of the word substantial might suggest that a complete deprivation is actually required, so that the barrier would be higher. The key point here is the potential flexibility and related uncertainty of the expropriation claim.

This view of BIT provisions among a wide range of states shows fluctuation of language over a fairly narrow range, and a marked reluctance on the part of contracting states to condescend to particulars. It is not possible to conclude that the differences in language are necessarily attributable to considerations specific to the contracting parties. Nor do they demonstrate deep doctrinal differences between states as to the extent of protection to be provided. However, there is clearly an accepted trend towards finding states potentially responsible for a broader scope of expropriatory action, while maintaining that the deprivation alleged must be

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