EXPROPRIATION: A NECESSARY CONSIDERATION
IN INTERNATIONAL BUSINESS EXPANSION
JAMES MAX MOUDY
Introduction:
On January 19, 1972, President Nixon issued a policy st,a tementon Economic Assistance, and Investment Security in Develop.ingNations and .therein established a fundamentally, sound 'vJ.e.:w:
toward expropriation.
"The wisdom of any expropriation
is questionable, even when adequate compensation is paid ---.
Under international law, the
, Uni ted States: has a right to
expect:
-- that any taking of American
private property will be nondiscriminatory,
. -- that i twi 11 be for a public
purpose, and
-- that its citizens will receive
prompt, adequate, and effective
90m pensation from the expropriating country." 1
This statement ,c oupled with overt actions by the United .States
government, such as the recent trade agreements with nations
not politically aligned with OUr own, reassure and encourage
foreign investment by domestic corporations and private investors. ' However, s.u ch statements may give · rise to a false sense of
. security in all but the prudent, cautious investor.
The import-
ance of a knowledgable elimination of all the probabilities of
expropriation
canno~
be over emphasized; however, no mathematical .
equation, no scientific process, no legally perfect contract . can
dispel the possibility that the foreign ihvestment may be nationalized~ '
This paper is not.intended to discourage foreign investment,
but to explore
R
portion · of the vagaries involved in. exporting .
capital,techriology, and business acumen to developing countries.
11
Five areas shall be discussed:
(I) a new era of multinational
business expansion, (II) expropriation - a general discussion,
(lIn case studies, (IV) compensation and remedies and (V) con-'
clusion.
In light of internationally accepted standards, ade-
quate compensation, in some form, must be paid, yet the maze of
possible remedies is at best confusing and can ultimately lead
,to no recovery at all.
For the attorney who enjoys concise,
formalistic legislation and judicially explicite case law, this
subject will be frustrating.
,There are no general rules, there
is no stare decisis to follow, there are only trends with innumerable variables.
I.
A New Era of Multinational Business Expansion:
The goal of , many domestic corporations is that of market
expansion; the primary concern of the private investor is financial enhancement.
"risk.
Both seek a high profit and a calculable low
The advent of extraordinarily fast communications and
travel has instilled an economically adventuresome attitude in
the investor - that is; the world is his oyster.
Unfortunateiy,
"the very countries in which the investor may pour money. man'power and expertis'e , may not share this attitude.
Quite often
these intrusions are considered financed imperialism.
It has
been suggested that the . multinational enterprise is an extension'
of political power. ' Following a review of several books regardt
ing the policies , theories, and effects of foreign investment,
Messrs. Keohane and Doorn Ooms state: ' ''the (multinational)
enterprise seems increasingly important for a number of issues
2
of world politics: ' economic growth and income distribution, and
.the reactions to them by p01it1cai act'o rs; re1at.ive powe~ posit...
.ions
of stat~s;
intersta.t e conflicts caused or
preC1pf~ated
by
'economic fac tors; and the ' emergence of transna tio'na1 relations in. .
which the role of state.s is not so dominant __ - •." '2
. A somewhat less ' theoretical study was made . by. Stanley C.
Metzger.
He suggests
that
recently within
the United States,
.
'
.
. th~re.have. been "restrictions on American exports --- created by
..theE. · E. C. ' (over Agricultural imports) ani maintained (by
Japan)"; and that recent domestic economic developments have
resulted .in
a1 trade." 3
"inward~looking
measures which constrict internation- .
The artic1e ' offers a thorough review of the com.
.
mission on: International Trade and Investment Policy (The William
Commission) which rendered its policy recommendations for the
1970's
in a report in July, 1971, entitled "United States Inter-
national Economic Policy in an Interdependent World."
The
.Williams Commission ,Report, and I believe correctly, recognizes
that restrictions on trade or investments may result in "adverse.
consequences for the United States and other countries." .4
The
dramatic importance of direct roreigninvestment in the developing countries is illustrated by the increase from 31.9 .billion
dollars in 1960 to 70.8 billion dollars in 1969.
The Williams
'Commission Report states that "the guiding principle for the
United States should be that the free flow of
direc~
investment
acrQssnational .b oundaries, whether into or out o'f the United
States,
benefits'. , this country - and . the world when it . results in
.-'.
.
'
more , economical : produc,t ion of gO~ds and services. It ,The "world
wide · accepta:nceand : ptomot1~nor . multinatio!'1al expansion 'Of
.
"
" .
.
.
'"
!
.
. .
.
• "
. ..
business : and investment enterprise is shown by the fact that the
' ''United Kingdom, French, Canadian, German, ani Japanese oompanies,
on 1966 figures, account for about 40% of all foreign direct in,v estments by major countries." 5 Thus the competition to ' develop
,foreign markets is impressive, and if the investment minded individual or corporation within the United States is not willing to
explore this ' financial opportunity; sophisticated investors and
c,o mpanies of other na t:l,ons will.
The William Commission Report points out that there may result
"naturalconflicts ' betweep investors and host countries concerning
, thedistribu tion of benefits, misunderstandings on all sides as to
:'the role of investment in development, ideaJ.ogical disputes centering on the merits of private versus public enterprises, and the
charge ',by some that foreign private investment is a form of econ"
omic imperialis\ll."
And yet, in light of such problems, the Report
suggest "(I) a continuation of support for private investment in
low~income
countries through the U. S. ' Investment Guaranty Pro-
gram and a mUltilateral insurance scheme -- (2) greater efforts to
neg.otiate Treaties' of Friendship, Commerce and Navigation containing international legal protections for investors (thus obviating
the necessity for,' such strict approaches as the Hickenlooper
:Amendment) and (3) a continuation of vigorous opposition to dis,crimination against foreign investment or expropriation without
adequate compensation --:-." 6
Keohane and Doorn' Ooms said " ' the extension of large
enterprises
,acrossnational
, boundaries
.
.
. .
"
~-
is likely
to produce
.
~
profound effects on ' economic efficiency" th~ ' gr~wth'})f productive
' capacity and the distribution of income and power between the
' sta~es
involved". They suggest the "internationally efficient
' allocation of - (labor, management, technology) - may sometimes
be possible only through geographic extension of the firms which
own them", and that '''benefits of improved resource allocation
, M __
may 'accrue to the host country through lower ,prices, higher
', factor returns or tax revenueslt~ 7
For the sake of brevity and relativity, the better approach
· in discussing the possible adverse effects felt by the host
country is to realize why the host country may nationalize the
, investment. The prudent investor will attempt to interpret the
actions and pre-investment requirements of the host country
in light of political motives and economic needs of the host;
otherwise a total. miSUnderstanding of the means to avoid possible
expropriation will result. A United States Department of State
report says the causes ( of nationalization) "are to be found in
such factors as: a) the view in many (developing countries)
tha:t they are excessively dependent on foreign companies which
export resources, take a disproportionate share of profits out
of the country and
-~-
exercise undue influence over governments
and lives of people through their international economic
power, b) the increasing responsiveness of developing country
leaders to the popular sentiment above, c) increasing self
reliimt attitudes " and d) then.appearance of infant industries
,
that compete against .foreign
"
flrmsw~theasier . access
both to less
expensive finanoing and more up-to-date technology". The
.,<
report states "in (developing countries)
'
.
a primary aim of eco- ,
.
: nomic nationalism
. is to increase control over their economics
.
~
,'. and to reduce 'the role of foreign firms, even at the expense of
'. economic growth , and teohnological advances. --- the gains in
, self confidence and national pride will outweigh this cost
: they ' tend to · minimize"'. 8 The
whi~h
prop~ety of all foreign investments
and the chance for success are direotly proportionate to the
amount of in-depth studywbich the investor, ' and his attorney,
pursue in understanding the above factors. A, perfunctory
surv~y
,: simply reduces the probability of financial · success. Unfortunately
, even the most careful planner can never completely reduce the
possibil1 ty of expropriation to zero.' 'However, as this section
illustrates, there is currently and will be in the future
, continued
c~pital
exportation to developing countries , for.any
"',
' various motives, and this potentially lucrative . !n'a rket should , be
. explored by the , investment minded businessm.a n.
II. Expropriation: A General Discussion '
The simple ,fact is that expropriation
.does occur and more
,
'
,
.
frequentlY than most investors would icare
to believe. For example,
,
.
.
. .. l
.
' .
.
between 1960 ' a~q1971, ". 9 countries ,An Latin America, 17in '
Africa, 7 in
theMiddl~,;~astand
.
'
,'
.
:9
'!foreign-owned
,
assets"'
.
"
~"
"
7, :i.~',As1~~ :b~veexpropriated
'
":.
It is important · to
und~rstand
the impact felt by the host
country when itexpropr.iates foreign property and investments,
:'f or therein lies a valid point of argument in preventing or, at
least; deterring the nationalization of the investment. In more
recently developing countries , " , whether any balance-of-payments .
benefits result from expropriation --- depends largely on both
:the ablli ty of the nationalizing country to run the enterprise
well and on the general climate of investor confidence the
governm~nt
is able to inspire. If the nationalization action is
.. ·t aken in the context of politics ---, declines in investment and
capitalfl1ght. may be far greater than any savings which the
elimination of the profits remittances of a foreign firm may
entail .... 10 Obvious effects are the suspension of any further
investments and flow of foreign capital into the host country.
In Latin America, it was found that .. the experience of
·governmental enterprise --- is such that any governmen1; takeover
'of private enterprise --- means a loss, not a gain, to the
economy ·---. Over the long run, the waste, corruption and inefficiency of government enterprises, the covert and overt
subsidies and earmarked taxes requisite to keep them running --represent a continuing drain on the economy that more than offsets
any possible advantage derived from confiscatory nationalization"'. 11
Oddly, this adverse effect apparently.: has no bearing once the
.host country has decided .to expropriate. Mr. Eder, the author of
the. previous quotation, went on to poi~t out that "there was
;.not
:
a single company whose reports were analyzed that was not
7
operating in the ' red ---. The losses ~ were disguis(ijd by including
fn operating revenues, or,o,as 'other income', such items as
concealed or open subsidies.
- special appropriations, and ear,
'
marked taxes,that is, taxes on the general public or on certain
industries, collec'tedby -tb:e government, the proceeds of which
are turned over to some particular - governmental or parastatal
enterprise, fre,q uently one which competes ' with ' the pri va te
industry that pays the tax -_ .. , thus ,nationalization of successfully operating private enterprise is not an aid but a deterrent
to economic development .. ~12
Equally important are certain detrimental corollaries
resulting from expropriation. International transactions are
"
rendered 'unstable , and the free flow of, trade and capital is
,
either altered or terminated. The mere possibility of expropriation'
is a persuasive deterrent to any future investment in the host
country. Idealistically, motives for foreign investment are
twofold:' (1)
exportatio~ '
of capital and expertise to aid a
developing country during its economic gestation period, and
(2) realization of profits from the investment. The two have
, proven incompatible. By equation, " , need
. - public funds
,
=
private investment, (yet) ' bUsiness (is) likely to go where the
greatest hope for profit (lays) ---"~ 13 Profit motives disappear,
in the face , of Poss:~?leexpropriation., , a~~ most investors are
.
i . : :. . ' .
not ' in the , business ' of
w
:
~
'
.. ~
eXP9.r.ting~id ,
...
•• • •
The worldwide colllll1
. ....uni. t'r,
,
, ~ ... .
:
•
'.
_:
',_
."
.
' ;
..,.
,
.' .'
t ,o dev:eloping countries. '
.' • . '
.
'
.
",t~ough , 1nternat1onal
.' ."
.
•
law, has
developed charac.ter1stic ,<. issues in determining the"unlawfullless"
ofexpropriatioh~ Elements which pervade the question of legality'
of nationalization include the public versus political motives
underscoring the taking, a presence or lack of discrimination,
the right of confrontation before and. unbiased tribunal, adequate
compensation for the assets expropriated, a right of appeal,
and unqualified assurances that the compensation will be paid.
In many instances, the expropriating country will maintain that
its sovereign 'acts may not be judicially examined by any foreign
court because of the Act of
St~te Doctrine 14, while the
aggrieved investor oontendsthat the doctrine will not shield the
alleged unlawful act under any standard of international law.
Where trUe international legal issues arise, most countries
appear to be willing to examine the validity of the
~oreign
act •
. Some examples of this are England in Anglo-Iranian Oil Co. v.
Jaffrate, Aden SUpreme Court (1953); the Netherlands in Senembah
Maatschappij N.V. v. Rupubliek Indonesie Bank Indonesia, Amstei'dam
Court of Appeals (1959); Germany in N.V. Verenigde Deli-Maatschapijen
v. Deutsch-Indonesische TabakHandelsgesellschaft m.b.h., Bnemen
Court of Appeals (1960), Japan in Anglo-Iranian Oil Co. v.
Idemitsu Kosan Kabushiki Kaisha, District Court of Toyko (1953);
Italy in Anglo-Ira nian Oil Co. v. S.U.P.C.R. Co., Civil Court of
Venice e1955), and'France in Volatron, v. Moulin, Court of Appeals
of Aix (1938).15 , Ina dissenting opinion in Banco Naciorial de
Cuba v. Sabbat1no;~: ','.j76U~S.
398,. 447 , (1964), Mr. Justice White
" ,
~
';'-
,
in discus.sing 'the , act of state doctrine
~
~s,a1d.."
the:..'reasons that
:underlie the deference afforded to foreign aots affecting
property in the acting country are several; such deference
'reflects an. . effort to maintain
a; certain stability and predict'
.
ability in transnational
transactions, to:,avo:1d friction between".
.
,nations, to encourage settlement or these disputes through
'
.
diplomatic means and to, avoid interference with the executive
,
16
control of foreign relations "'.
The "position of the United
States judiciary when confronted with the ' act of state doctrine '
will be developed more fully below; however, Mr. Justice White
-expressed what I believe ,to be the modern juristic direction in
stating " ' principles of international law have been applied in
our courts' to resolve controversies not inerely because they ,
provide a convenient rule for decision but because they represent
a consensus among civilized nations on the proper ordering of
relations between nations ---. Fundamental fairness to litigants
as well as the interest pf, stability ' of relationships and
preservation of reasonable ' expectations call for their application
whenever i nternat i onallaw i S oontroll
ing i n
, '
II.
.17
case or controversy.
,
,III. Case Studies.
Hopefully, case law will Ultimately' develop homogenous
,
' '' ,
.
legal precepts which •the ',' international, ,l egal community will
recognize ,as trustworthY
guideline~
for : ,~-.l.l
- .
,:
' . : . , . ..
' legal problems arising
",
.'
from , wrldwidebusiriess1n'vestm~~t~.
: unhl that~1me, calle law
.
. ,:
'. ...
... . .. :
".""
',:
,'. '
'
' ".
10
. .
,",
, !
".
can only effectuate trends for legislation and establish
remedial rules of law for local courts. This section is included
to illustrate the multifaceted legalistic problems and reasoning
whi.c h counsel ID/?y encounter in litigation.
A. Banco Nacional 'de Cuba v. Sabbatino, 376 U.S. 398,
84 S. Ct. 923, 11 L. Ed. 2d 804 (1904).
The quantity of excellent material which has been written
.about Sabbatino,supra; 1s ''almost'' inexhaustible. Although the
result has n' vexed ", 18 academicians and counse'lors alike, the
:case is by no means the final arbiter of judicial policy regarding
.recovery forexpr6priated property of American citizens. There
.is Ii. definite trend in the United States jUdicial system to
disregard the act of state doctrine when international law
:standards have been violated.
In Sabbatino. supra, the defendant, an American commodity
;broker d. b. a. Farr, Whitlock
&
Co., had co.n tracted to buy raw
. sugar from Compania Azucarera Vertientes (C.A.V.), a Cuban
corporation principa1lyowned by United States citizens. In
:1960, the Cuban govarnment, by Executive Resolution, expropriated.
a1l property owned by U.S. citizens including C.A.V. The Cuban
government a1lowedthe raw sugar under contract to be shipped
only after Farr,Whitlock & Co. signed a second contract with an
instrumentality of the Cuban government, Banco Para el Comerdo
Exterior de Cuba, .t heassignor ' of Petitioner Bartco Nacional de
.
,
':
Cuba. When the sugar : reached ;a New York port., Farr ,Whi tlock &
.... , ...
'
·Co.,accepted "
the
bills':
of lading, sold the sugar and retained
:
. .. : '.
.'
'
th~
proceeds. At this same time, Peter Sabbatino, a court
"
apppint ed receiver ' for the assets 'of C.A.V i~ the ~nitedStates,
enjoined Farr , Whitlock & Co., froIr. diSpoSi!~g ' of the _proce eds,
claiming they belonged to C.A.V. as original owner of. the sugar.
Purs~ant
to a court order, Farr, Whitlock & Co., transferred the
proceeds to Sabbatino.
Petit~oner
then instituted this action in
the Federal District Court, Southern District, New York, alleging
conversion of the bills of lading and seeking an injunction to
restrain Sabbatino from exercising any dominion over the proceeds.
The District Court found that title to the sugar had not
passed to C.A.V. at the time of expropriation, thus such property
' was within the territorial jurisdiction
of Cuba and subject to
acts of the government,
but went on to saY' "' the Cuban expro,
, priat:l.on decree (violated
respects: ' It, was motivated
interna~ional
b~
law) in three' separate
a retaliatory and not a public
purpose; it diLscriminated against American nationals; and it
19
failed to provide adquate compensation"'.
In his opinion,
District Judge Dimock recognized the right of each sovereign
' state to determine its own course of actions but said such a
right is limited by international standards. He stated:'
"The taking of the property was not justified
by Cuba on the ground that the Sta te required
the property for some legitimate purpose or that
transfer of ownership of the property ~was " necessary
for the security, defense or' soclal good of the
&tate. The taking was avowedly in, retaliation for
acts (by the U~S. government) , and was totally unconnected with the subsequent use of the ' property
being nationalized. This fact
,. , alonE!".. is
., sufficient
.-
12
to render ·the taking violative of' international
law " '• . 20 , .
.
The Court of' Appeals, 307F. 2d 845 (2d Cir. 1962),
.affirmed the decision of' the District Court primarily relying
upon two letters written by officials of' the United States
Department of' State to the ef'f'ect that no adverse effects would
accrue' to the Executive Branch if'Cuba's actions were judicially
tested.
On certiorari, the United States Supreme Court, 376 U.s.
398 (1964), .reversed and held that in light of the act of' state
doctrine, no jUdicial examination may be made of the actions of'
a foreign sovereign government in taking property within its
terr:l;torial jurisdiction. There can be no doubt that the majority
was
inf'luence~
by the f'act that the Executive Branch intervened '
on behalf' of Petitioner ( Banco Nacional) in an amicus brief.
" ' This intervention undercut the assumption made by both lower
Federal courts that the
~xecutive
had authorized, or at least
indicated, that it would not be embarrassed by a suspension
of the act of state . doctrine and an examination on the merits of
the Cuban expropriation ---. (The amicus brief) made it clear
that the Execut1vedid
not think that a court should ever
,.
suspend the' actof state doctrine on the basis of any evidence
of Executive intent other that a 'Bernstein Letter', that is
..
."
I
",
•
an explicit and formaJ,commun1cat1on iby the ,E xecutive to the .
..
21
court authorizing ·a . suspension ,.~
' The Supreme Cout.t in
Sabbatino~ : supra;
reached the
,
13
'
following results:
1. In light of the principle of comity, Cuba or
any other sovereign state may sue in a United
states court even if diplomatic relations have
been severed, since the recognition of such a
foreign state to speak in behalf of its citizens
is a political versus jUdicial function, and the
Executive Branch has, in this case, filed an
". amicus brief in behalf of Cuba thereby upholding
:' its sovereignty.
2. Cuba expropriated the sugar and not a mere contractual
right of C.A.V. Since the title to the sugar remained
within the jurisdiction of Cuba, the most important
issue . is that of the legality of Cuba1s actions within
the act of state doctrine rather than whether
the Court is being asked by Petitioner II ' to
· enforce the public law of a foreign state (which is)
not cognizable in the courts I~ of the United
States. 22
.
. ~ 3. Althoug;h neither international la,. nor the United
States Constitution require the imposition of the
act of state doctrine under these circumstances,
and the Bernstein Exception has not been effectuated,
II the ,Judicial Br anch will not examine the validity
of a taking of property within its own territory by
a foreign sovereign government, extant and recognized
by this country at the time of suit, --- even if
the complaint alleges that the taking violates
customary international law"'. 23
4. It is a function of the Executive Branch and not
the judiciary to establish " 's tandards it believes
desirable for the community of nati~Us and
protective of · national concerns ".
' Although the Court felt that victims of ,expropriation should
have remedies, it left in doubt the use of Art. III. Se ctinrn2,
Constitution of the United States, to such aggrieved investors •
.The Court simply rei tera tedfftas remed:Les"tpe effec ts following
expropriation 's uch as the ,,,cr.eation of an unfavorable investment
.'
I '
climate and suspension d,f " foreign aid and · embargoes rather than
establishing affirmative 'steps. which . could be taken within our '
14 '
'c ourt· system to recover losses.
Mr. Justice White, dissenting, distinguished cases cited
by the majority as supporting nonjudicial review and said
11 ' 1 start with what I .thought to be unassailable
propositions~
that our courts are obliged to determine controversies on. their
'meri 1;s, in accordance with the applicable law; and that part
of the law --- is international l aw n,. 25' Mr. Justice White
would have dispensed
wit~
application of the act of state doctrine
in the face of obvious violations of international law and,
emphasizing the Court's obligation to judicially examine such
lawless acts, said " ' In the absence of a specific objecti on
(by the Executive Branch) to an <examination of the validity of
Cuba.' s law under international law, I would have proceeded to
determ i ne the ,issue . and resolve this litigation
on the merits ". 26
.
.
Perhaps the most appropriate statement which I have found
concerning this case is
II'
Sabbatino is like a good stew; it
contains a little something for everybody n,. 27
In 1961, the Hickenlooper Amendment was enacted as Section
620 (e) (1) of the foreign Assistance Act of 1961, as amended. 28
It required the President to suspend all U.S. assistance to any
country which expr.opriates American property without speedy and
adequate compensation. In 1964, the Legislature enacted the
"Sabbatino Amendment'" which states in" part:
"~--no court in the United St"ates shall
d p.cline on the ground of the federal act
of state doctrine to make a determination ,
on 'the merits giving effect to the principles
of ,international law in a case in which
15'
a cJ..aim 6ftitle --- is asserted by
.. any party --- based upon a confiscation
or other taking after January 1, 1959,
by an act of that state in violation of . 29
tb. p;r1no1plu of 1ti.h;rnnt1onAlkw ·---".
,
It would a}lpearthat the Legislature had laid to rest any
questionsconcernfng the · act of state doctrine, but how have these
amendments fairedon the judicial battlefield? On remand, the
Second Circuitafffrmed the original Distric.t Court dismissal in
· 'Sabbatino, and held
fl·
it. is clear that if these domestic
statutory standards are different from the international law
· standards which we applied when we decided this case formerly, the
statutory standards tend to .be more exacting upon the expropriating
nations. --- the taking before us violated international :Law
'".under the possibly less exacting standards which we then applied,
' ~he
application of the new statutory standards would not affe.c t .
. 30
our decision here II,.
In upholding the consti tu tionali ty of .the
Hickenlooper Amendment, the second Circuit said n the amendment itself will dO much· to deter illegal takings and thereby
exert: a positive influence to avoid the embarrassment to U.S.
foreign policy interests caused by such takings.--- it will .
serve notice that . foreign . sta tes taking action against
U~ ; S~
· investments in violation of international law cannot market the '
· product of their expropriation in the U.S. free from the risk
· of litigation
fI '
•
31
Although the Hickenlooper Amendment was a . well arafted
instrument, it is wo:rthlessthan the paper1t is written upon
..
.
~.
' . " .. "
unless the Exec~Uve ·Bran~J:i. is willing t() apply it according to
'.
,
'
<.
16 .
,
'
its most strict terms. For example, in October, 1968, all the
Peruvian property of International Petroleum Company, a
.subsidiary of Standard Oil of N.J., was expropriated following
the ouster of the Belaunde Government. The Hickenlooper Amendment, which would have caused the sUspension of U.S. aid and a
total halt to importation of Peruvian sugar, was not enforced. 32
It ,
Two months after the expiration of the Hickenlooper Amendment
deadline - - with no action by the U.S. to impose the sanctions
--- there ensued a series of confiscations of American owned
.property _..- in Latin America--- that has not been equalled --since Castro ___ It.~ 33 Mr. Eder does point out that the Hickenlooper
Amendment is being nullified and he cites President Nixon's
address to the Inter-American Press Association wherein Mr.
Nixon . saids'
' n I am also ordering that . all other onerous
.conditions and restrictions on U.S. assistance
loans be reviewed wit the ob ective of
mOdifYinw~r ,eliminat ng them n ' emphasis Mr.
Eder's). 3 . .
Taking issue with several points in Mr.
Furnish has said
It.
Ed~r's
article, Mr.
Hickenlooper's Amendment is like a gun with
only one round in it against a crowds no good when you have
to use it
n '.
35
Occidental Petroleum Corporation v. Buttes Gas and Oil Co., 36
tested the "Sabbatino Amendmentlt"Anantitrust suit, the plaintiff
alleged
that the defendant had createdu
i d1spute :'between·,twu:',
,
sovel'eigl1s ~ :: onEr ,of:: wh~ch::.Iiad granted , plaintiff' an oil conce ssion;:.
".
'
1
in an effort todepr1veplaintirr
of . its ooncession, and
.'
' ,'
17
:that defendant.' s co-conspirator, the second sovereign, had
extended its :territorial waters in an effort to deprive plaintiff
of its offshore concession, thereby attempting n: confiscation,
in violation of international
law"~
In deference to this
second sovereign's action, the court held that the complaint
failed to state a caUse of action
of the act of state
becaus~
doctrine, saying n' the doctrine is a reflection of the executive's
primary competency in foreigh ·.affairs and an acknowledgement of
the fact that, in passing upon foreign governmental acts, the
judiciary may hinder or embarrass the conduct of our foreign
relations"', at p. 108. Although the plaintiff argued n. that the
doctrine has been sapped of its vitality and rationale by
the so-called ·'Sabbatino Amendment,n., at p. 111, the court held
"the legislat'ion has been strictly cons t rued and courts have
continued to rely upon acts of state in cases deemed not precisely
fitting the statutory language
It:
.
,
at p. 112. Plaintiff contended
that the doctrine immuni·zed the defendants even though they had
the extension of the territorial waters; however, the
ind~ced
cour~
held that the plaintiff must prove damages and any
inquiries into the poss1ble wrongful actions of defendant
n· would be the very sources of diplomatic friction and complication
tha t the act of state doc t rine aims to avert n,. at p. 110. On
October 24, 1972, petition for writ of certiorari to the United
"
, States Court of Appeals for the Ninth Circuit was denied.
The latest endeavor by the United states Supreme Court to
clarify its position regarding .the act'·,of ..'state doctrine is
First NationaiCity Bank v. Banco Nacional de Cub~,
\
18
37.
In .1 9'S, Petitioner loaned $1 ,,000,000.00 to a Cuban bank
which subsequentiy was nationalized in the latter part of 1960.
Petitioner
held the collateral mcuring the loan, in this case
. .
U~S~
Government Bonds, .at its New York office, and upon the
nationalization by Cuba,sbld the collateral 'and
~pplied
the
proceeds to the repayment of the principal, then $10,000,000.00,
and the unpaid interest. Petitioner realized from this sale
$1,SOO,000.00 .in excess of the amount due on the loan and retained
this excess as payment to off-set its alleged damages suffered .
.as .a .r esult of the . expropriation. Respondent sued in Federal "
District Court, Southern. District of NEJW York, to recover this ·
excess.
The District Court, 270 F. Supp. 1004 ( S.D.N.Y. 1967)
granted summary judgmentin,savor of Petitioner holding that
because of the Amendment to the Foreign Assistance Act of 1964,
the act of · state doctrine did riot prevent a judicial determination
of the merits of the case, .and that Cuba's actions ' violated
international law.
" TheCourt"
of, Appeals , ': l:r~1 •. ~F, ,2d. 394' ·(2d :Cir. · 1970) ,
It .
hE!ldl(1) the H1ckenlooper Amendment was not applicable under
the circumstances 'of the case, because --- none of the expropriated property . had ever been brought in the United States,
(2) that the act of .state doctrine
pr.evented the court from
inquiring into·thevalid1ty ·of the expropriat1on,and(3)
'
"
.
(Petitioner) had no righttoapplytl:le excess to the losses
L,t'
suffered-..
;.n',"at .1 2L'.Ed. 2d 466.:.67~
.
,.
.
.
~ ". ,'
.
.'
\.
~
,
. 1.9 ·
.
,
On ,certiorari, the United States Suprema Court reversed
and
remflnded. Mr. Justice Hehnquist, ;lo'ined by Chief' Justice Burger
' and
~r.
Justice White stated, after noting tha,t the Executive
Branch had expressly told the Court that application of the
doctrine would not advance the interests of American foreign
'policy and that the Bernstein exoeption is a
val~d
exception to
the, act of state doctrine,
:
.. ~ .
, "The act of st ate doctrine
is a judicially
accepted limitation on the normal adjudicative
' processes of the courts, springing --- from the
,' --- sound principle that --- individual litigants
may have to forego decisions on the merits --because , . the invo lvement of the courts in such
a decision might frustrate the conduct of the
":Na tion I s foreign policy. I t would be wholly
illogical to insist that such a rule --- be applied
in the face of an assurance from that branch of the
"federal government which conducts foreign relations
that such a result would not obtain"'. '+06 U. S. at 769.
Mr. Jtlstice Powell cohcurred saying " I believe that the
broad holding of Sabbatino ( 376
u.s.
428) was not compelled by
the principles, as expre's sed therein, which underlie the act of
shte doctrine", 406
u.s.
at 774. He established his criteria
for determining whether the judiciary should hear cases in which
possible conflict with the Executive might iirise by saying,
, "unless it appears that an exercise of jurisdiction
, would interfere with delicate foreign rela tions ,
conducted by the political br,a nches, I conclude that
federal courts have an obligation to hear cases such ·
as this. This view 'i ,s not inconsistent with the
basic notion of the ,act of s t ate ,doctrine which
requires a balancing of the roles of t.he judiciary
and the political branches. When it is shown that a '
conflict in ' those roles exists, I believe that the
judiciary ,sho1J,lddefer 'beoause, as the Court
suggested in Sabbatino, the resolution of one
dispute by the jUdiciary may ;be outweighed by the
20
potential resolu,t ion of 1lIll1tiple disputes '
by the political branches"', 406 U.S. at 775-76.
~y
applying this ' criteria, he would thereby avo:1dtotal
abdication of judicial; responsibility, whll,e '!'Iaintain1ng a
proper , balance between the jUdicial and poli t;i.cal branches, of
,the government.
Justices Brennan, Stewart, Marshall and Blackmun
' dissented. In short, the dissentparalled the, holding of
'Sabbatino, supra, primarily because they felt that the act of '
state doctrine ,must be given full ' effect as long as the
international laW" regarding expropriations was uncertain. ~~ They
cited Mr. Justice Harlan's statement in Sabbatine, supra. wherein
,he said
It,
It weuld be apparent that 'the greater the degree ef
,cedification cr censensus ccncerning ' a particular area of
international 'l aw, the mere apprepriate it is fer the judiciary
to. ,render decisions regarding it ---. It is difficult to.
imagine the courts of this ceuntry embarking en adjudication in
an area which touches mere sensitively the practical;,:and:i1dee- ,
~ ~,
, "
8
legical goals ef the natiens
In respo.nse to.
~h:\.s
It.
3
dissent, I can enly ' cite what I fe'e,l '
to. be the better reasoning when Mr.' Justice Pcwell sad.dl'
"Until internaticnal tribunals command a wider
constituency, the ccurts of varicus , countries
- afferd the best means for develepment cf a
respected bedy-of international law 11-, 406 U.S.- at 775.
At this , tiine, , :I, t appears that , jUdici'al ,,,examinatien cf
expropriative actS ~r foreign scvereigns within the United States
..
,
ccurt -system isaprobab1lity~
Yet the problem
~f" ~the seemingly '
.
'. ;,".
'."
"immcvable cbjEi~t~:, (the,Exec)ltive13r~nchl 90nfrenting the
.
' j.
.
'.
, ".-i,
"irrestible force" (the' ,Judicial Branch) ' in determining the
right of review has not been solved" and the practicing bar
can only hope for more enli p.; htenment from future c ases.
; B.
Petroleum E
Syracuse
In ,1957, the United Kingdom of Libya granted Mr. Nelson
' B. Hunt a concession for exploration' and exploitation of oil
in an, area called the Sarir.deposit. , In exchange for exploratory
operations, Mr. Bunker transferred a 50% interest in the above
concession to B. " ~Po Exploration, a corporation principally
owned by the British Government. The company carried out extensive
drilling operations, constructed a pipeline from the' Sarir to
' the Gulf of Tobruk, developed ship berthing facilities, storage
tanks, residences and a treating plant. All of the .above
transactions and construction ,,,ere done under ' authority given ,
bY the PetrOleum Commission of the Libyan Government.' It was
estimated that the company spent
It
35 million pounds sterling in
prospecting operations and about 54 million pounds sterling
It
39
on the various constructions. The income which the Libyan
' Government coUld realize from the concession was estimated to
'be 37 million ' pounds sterling ,per annum.
On December 7, 1971, the Libyan Government nationalized only
:the interests of B., P. ,..Exploration, including both the oil
exploration-exploitati'on , rights in th~sa:r1r,:, and the installations,
,
,
and transferredthesea:s.s ets, t~ . Arabian ' Gulf Explora tion Company,
ari1nstrumeritality ofth~~
Liby:an
, Gover:nment.
Later, it was
f· , ".'
,
..
admitted before the U.N. Security Council that such nationalization was in retaliation against the British Government for
' allowing the .Iranian Government to occupy several small islands
'
in the Persian Gulf heretofore owned by certain Arabian SUltanates.
B. P. Exploration notified the Libyan Government on
," Decemper 10, 1971 that it considered the nationalization a violation
,of the terms of the concession and of international law and,
by the terms of the concession, appointed an arbftrator. At the
' same .time, B. P. Exploration notified either by personal letter
or publication all possible purchasers of crude Oil that it
considered itself to be the owner of all crude oil extracted
from the Sarir, and reserved the right to bring suit to recover
the crude from any third party purchaser of the 011, in effect
"
threatening
an economic blockade t ,o the movement of the oil.
.
"Thereafter, B. P. Exploration learned that a shipment of
crude 011 taken ,from the, Sarir had been exported by SINCAT to
the Sicilian port of Priolo. Since none of this oil was taken
from Mr. Hunt's one-half of' the concession, B. P. Exploration
contended that it was the owner of the oil. The Syracuse (Sicily)
court authorized the taking of samples, of the, oil prior to its
,final unloading , to establish the identity of the oil as having
been extracted :fromB. P.:':Exploration's concession in the Sarir.
There has been no decision at this time concerning the
ownership of
, ~he
011. B. P. Exploration alleges (1) the provisions ,
under the nationlllization
law for coritpensation
are
' inequi table
••
. j
.
and iriadElquat e since the amount will : be determined by a committee
23 ·
-
consisting wholly . of members par.t isan to the Libyan Government,
their decision is
fi~al
and without a right of confrontation or
appeal, and taxes and other debts alleged owing to the govern' ment will be dBducted prior . to any payment, (2) that the nationali. za tion violates precepts of international. la,., in that it served
no public purpose, but was admittedly a retaliatory measure against
,
.the British Government, (3) that 'such nationalization is political
and discriminatory since the concessionary interests and installa.tions .of B. P. Exploration alone
were taken, and (4) title to
·oil extracted from such concession remains with B. P •. Exploration.
Such a case in the Supreme Court of the United States would
be risky since we are not sure of the Court's position regarding
t !; e act of state doctrine. In<the ca s e of Anglo-Iranian Oil Co ..
v. Societa Unione Petrolifera Orientale, Civil Tribunal of Venice '
(195'3), a British company sued to establish its ownership in
oil purchased by the defendant from an agent of the Iranian
Government, following
th~
Iranian nationalization of plaintiff's
property. The court he.ld that the defendant had title to the oU
in spite of the Italian law 1;hat i., in no case can the laws and
acts of a foreign state --- have effect in Italy when they are
contrary to ( Ordine Publico):'
.. --- it makes
laid down by
those of our
. our judge is
. itself ---.
no difference whether :the principles
(their) :.legislators are opposed to
legislation, --- the sole issue before
the legal consequences of the ' act
."
' In this case' the oil --- was taken" in · Iran by
the Iranian State in carrying . out,',the nationalization
law,
and ",as disposed'
of pur:suant::;to
.a . contract
,
. ,
"
..... . !
.'
~.
~--.
of sale all in conformity with the legal
. order of Iran. --- To recognize as operative
in Italy these effects already completed,
does not signify to cooperation in bringing
them about, but merely to take ac~unt of
what has already been done ---~.
.
. That court also felt that any questions regarding compensation
wer~
outside the problem of "public order" '.
In Anglo-Iranian Oil Co. v. Jaffrate et al, Supreme Court
. ·of . the Colony of Aden (1953), the same British corporation sued
the Swiss purchaser of oil which had been extracted from plaintiff's
. expropriated concession. The court held that title to the oil
.' remained with the plaintiff. Regarding jurisdiction, the court
. said that the cause of action arose in Aden, not Iran, since
defendant's refusal to release the oil to plaintiff took place
in Aden. In ruling
oil the issue of whethe'r a foreign expropriation
,
law may be judicially examinp.d, the court said '" here ' t can
only find to be true the plaintitf'.s contention that expropriation
has taken place without compensation and that this is confiscation"'.,
Although defendants had contended that they purchased the oil
in good faith and were protected under Aden l 'a wof sales, the
. court held " even i f
it is accepted that ( . an Ita4ia,n company
negotiating the sale)--- .(is a ) mercantile agent within the
•
.
I
meaning of the ordinance, Cit) was certainly not in possession
.'
.
of the goods with the consent
of the owner __ It-.
",
41
Obviously
to make this determination, the court· had to review the merits
of the expropriation
determinathat
such
actions violated
. and
'..
.
.'.
\
-
irtternational.1aw.
Lj,ke1Q.se, i t held that under the law of Aden,
.
-.-',
the
piaint1ff rEl:t;a1n:e~~
..tJ tle to. the oil.
,
, .' :.
.
~
~ .
-'
:.'
. 25
The
key:a~pe'ars ' to
be in establishing ownership of the
property under the law of the forum. Once such title is settled"
the plaintiff ' can "then assert appurtenant rights and effectuate
a blockade of potential markets reinforced with threatened court
actions. Of course, this requires plaintiff to follow similar
procedures in eacb country where the property may be imported.
' The enforcement of such a blockade can be brought .about in two
ways: ' through diplomatic channels whereby the government of each
country will recognize ownership of the oil in the plaintiff
:'and refuse to allow impillrtation of , the commodity, a rather
,doubtful occurrence, or through the courts in each country where '
,the commodity may touch port. However, in each, the presence of
political ideology or judicial comity, or both, may frustrate
plaintiff's efforts in attempting to establish his ownership. The
,real effect of such a blockade is the impact which it 'has on the
expropriating country as illustrated below, and.thus a deterrent
to any future expropriatory actions.
C. The Chilean Nationalization of the Copper Industry.
In July, 1971, the government of President Salvador Allende
expropriated th~copper interests of three American companies,
Kennecott, Anaconda, and Cerro. The expropriatory action of the
Chilean government: resulted
in Chile ', "becoming the third largest '
.
~
copper producer.;
in. ;..thEl
~rld. Kennec6tt
estimated, the worth of
.
,
- '
,,-, I 'I
its interest to ~ be $15'0,000,000.00;", Anaconda estimated it's interests t
,
,
, ,, '
value at $430;o.~~~<?9~~~f and ' Cerr,? ' valued ':1ts property a:t .
26
#3]-,00(1)1,000.00. 42 Effective ' December 31 , 1970, the Chilean
Comptroller General established 'a book value for Kennecott's
mining interests of "$365 millipnn'" 43 The Chilean law made
provisions for dedUctions for revaluation, discounts, reparations,.
and "excess profit"', a ' nebulous term, cal.c ulated by determining
the world wide profit margin of each. company lfIf.
resulting from the .
sale of copper asa percentage of book value. The Chilean
government set · an arbitrary figure of 40 cents per pound,<which
'forexample might equate after a one year period, to an income
of $10,000,000.00. If the book value as set by the Chilean
government was $365 million, the percentage is approximately
3%.
But if the worldwide sales in'copper resulted 1il an income
of $20,000,000.00, that is the copper was sold for 80 cents per
·pound, this "excess profit" of $10 million would be charged off
,
-against allowable compensation. In ' September, 1971, Chile
announced an "excess prof! t'" deduction of $774 million which,
;in essence, made Kennecott indebted . to Chile. This determination
was not appealable. Interestingly, only ' Kennecott and Anaconda
'were made subject to. the itexcess profit"pr6vi's ion, Cerro being
exclUded - blatant discrimination.
The United St'ates GovernlIient remained disheartingly quiet
during the entire confiscation, ':'Secretary
of State Rogers saying
.
' .
'.
, ".
"'
.
"only that" the Chilean .actions 'were , a "serious departure from
- . .
. ..
. ' .,' -. "
' 45 · .
accepted standards of interna,t i.op.al law"'.
In Decemb.e r, 1971,
!,
Kennecott ·and Anaconda ,tiled art appeal before .the Chilean
Special copperTr:1bunal'; ' Jlh~ i.~st a:vailablerem~dr under 9hllean
27
law, but in September, . 1972, both companies withdrew, Kennecott
announcing that it would pursue its remedies in the courts of
" .'
. 46
other nations. ' . '
In October, 1972, Kennecott brought an injunctive action in
a
~rench
court to restrain a French manufaoturer from paying
for copper purchased from Codelco, the Chilean corporation which
had taken over the. Kennecott assets in Chile following the
expropriation. On , November 29, 1972, ,the French court allowed
the payment of $1.3 million to Codelco for the copper, but ordered
the ' Chilean government to. hold the money in escrow pending
further investigation on the merits, clearly a victory for
Kennecott in their endeavors to obtain judicial determination
of the legality of the Chilean expropriation. The French judge
said Codelco was to be treated like any other commercial concern
despite its connection with the Chilean Government. 47 Two
· effects resulted: Chile halted all shipments of copper to France
and renounced .theFrench· court's action as serving imperialistic
designs; and large copper trading companies policies toward
Chilean ore were altered because of fear of possible court action.
,
48
Kennecott also file.d a similar suit in Sweden.
Chilean
President Allende 'a dmitted the suits lIVere costing Chile millions .
of, dollars. Resaid
the su:l:t;swere holding up the decisions of
.
copper users to buy Chilean
copper,o~struoting
..
with European Banks when .Chile
credit negotiations
",
despa~ately
needed the funds, and
. that sucrh court · actions nviolatedth~ principles of non:
.. "
, 28
intervention in the affairs of a so'lierElign state
on '.
lt9 The
Wor l d Bank also, warned ' Chile that its 'credit was impaired by
such acti ons.
.
! .
, , KEjnnecott did not fair so well in , a suit, in West Germany,
after. releasing 'f 3. '; million it had impounded,
". where " the court;,
,
'
"
,'
,
':'refused to require Chile ,t o hold , the ' payment in escrow. Kennecott
', promptly announced it wotlld file suit in a West Germany court
,seeking to '.hold the 'purcha ser of the ore for the value of the
copper it processed and sold to consumers.
50
,Although the French and Swedish court acti-ons are still
,pending, Kennecott has filed similar suits in Italy a gainst three
"Italian copper users wherein kennecott alleges itself and not the
51
'Chilean Goverrunent to be the owner of the ore.
'
To avoid such
suits, Chl1ee~ther avoids selling to companies in countries
where such suits have been allowed or sells the copper through
third countries, to subsequent, purchasers to "disguise" the sale". , 52
It is the unfavor able economic impact felt within the expropriating
country caused by: such suits coupled with the adverse credit
,ratings which ultima tely may reduce the number of expropriations
'or, at least, compel the ' payment of 8:iequate compensation for such '
expr6priat10n.If 's uch n~isance
actionsres~1.t
in some affirma- '
.
. "
.
~
.'
'
.
tive ' monetary or .possessorY
recovery·~ they are,. worthwhile
' as. a
.
.
,
.
IV. Compensation and Remedial Actions
The . issue
i~
not .w hether, under international law,
compensation should be paid, but rather how
m~ch
and by what
means. As the cases in Section III illustrate, the means of
recovery may inclu?~ lawsuits, diplomatic intervention, or
attempted market blockades for the product. This section is a
potpouri of mi sc.ellaneousi tems which counsel will want to keep
in mind when his client is considering either a foreign investment or litigation to re'C'over assets 'expropriated by a
foreign sovereign.
As seen in the Chilean problem, vailuation ia a rather
sticky problem. The United States position is that" in the
case of an operating enterprise, adequate compensation is usually
considered to be an amount r.epresenting the market value or
, going concern' value of the enterprise, .calcula ted as if the
expropriation or other governmental act ' decreasing the value. of
the business had not occurred and was not threatened
the standpoint of countries 1,rhich export capital,
II,
II'.
53 From
the right
measure of compensation is the payment of adequate ( or just)
compensation which is defined
the ' time of the t t;king
II~ 54
as the value of the property at
Develo,p ing countries would maintain
that ""the obligation in international law on taking is for the
payment of 'appropriate' compensatio.il"wh1.ch is not to be
determined bY ,market value, but on a ' basis
, 'rights and wrongs
I
~hich
adjusts the
of the 'P arties ' .:.~..55It has been suggested
that" ' full compensation (means) the :value of the property
30
,
' 56
expropriated plus interest-,
and factors to be considered
are: "Thenumher of people effected, political ideology of the
country , - i.e. capitalistic versus socialistic; who shall benefit
by ,the investment- the curpent or future generation, and
financial c'ondition of the state. 57
International investments give rise to contractual problems.
The contracts in issue normally are between the government of'
the developing country a,n da.., foreign private investor, and have
been termed
~ such
II'
economic development agreements'"
58. The value of
contracts is measured by the security: whlLah each party
' rece1ves~
that"' is " it ' is indispensable that agreements of this
type guarantee to both parties not only a real equality of
'treatment --- but also a certainty as --- to the legal regime
of their collaboration ---. If the protection of public interests
'wlt,i ch the state ' has to ensure makes it necessary to reserve
'certain advantages aild possibilities, this should be made clear
,
"
,
"
': in ,the contract itself "'.
59
Therein we ,see that the nature of
the 'parties involved can also cause great difficulty. One, the
foreign investor has primary motives such as profit, market
,expansion or exploitation of natural resources; the stat e i 's
motivated by protection of its people and resources and enhancement of its identification as a sovereign entity thus such
contracts have also beEm termed
There is an
ever ' prese~t
II'
qua,s i-international agreements "'. 60
choice ,of law problem in these
contractS. At times:' the ' stipulation in a contract that a particular
.
.! , •
.
, law is to beappiiedmaybfil, "effective. One must watch for such
insertions 'as a "Calvo Clause" wherein the foreign investor
, accepts local law as the law of the contract.
61 "There:ls
, often a deliberate intention on the part of the foreign
corporation not toantagoniz,e the local government in the course
of delicate negotiations --- in spelling out that local law
" should not govern the contract ---, (likewise) --- lawyers on
, the government side prefer to evade (this) issue ___ It. 62 Under
normal conflict of law rules, the law of the sovereign would
" rule. To avoid this, it must be shown " . that the parties intended
to r each a different resul t-(ei ther by) - the ins,e rtion of a
clause providing for international arbitration of disputes; or
a reference, either express or implied, to general principles of
law as the law. governing , the contract
ft.
63 . Internation law is
considered as having its own principles regarding contractual ,
cons)f;ruction; for example the Libyan Petroleum Law of 1955
states: (an agreement)"shall be governed by and interpreted
in acc'ordanc e with the laws of Libya and such principles and rules
of international law as may be relevant , ---"'. 64
Arbitration clauses are frequently inserted into such
contracts. " . It giyes the ( contract ). its true character by
stressing that it is a collaboration of 'a special type which
cannot reasonably be
internal law
Itt.
include~
in the orbit of some particular
65 But the success of" the- arbitrators will be
measured by theexpl1citness of theco~t~act.
Any
" .
, .
. , implicitness
must,
~therefore,. be : r~so1.ved by the " arbitrators. It is also
. ., '
. ',
32
essential that the arbitration clause expressly set out how
the arbitrator,s are ,to , be named, the remedies which can be awarded,
and the means of enforcement.
Various international arbitral commissions have been
established. The ' Inter";Ani~rica~Comlnercial Arbitration Commission
(IACAC), a western hemispheric organization, allows a party to
:1'ile a complaint or answer., with the Commission which will suggest
arbitrators if the parties ,have not. Enforcement of an award is
,
,
.a severe
problem and 'i f , the defendant will not honor the judgment,
.
,
'the plaintiff may have the unhappy choice of using the courts of
,
,
66
• the defendant. , The Convention on the Recognition and Enforcement
.of Foreign Arpitral Awards, a United Nations organization allows
the party to file
It ,
in court the ~riginal (or certified copy) '
of the arbitral agreement and award, whereupon enforcement follows
,unless ' the defendant establishes anyone of five specified
challenges, i. e., absence of a valid arbitral agreement, lack
'of a fair opportunity to be heard, an award in excess of the
submission, improper. arbitral procedure, or lack of finality of
the , award in the rendering s'tate
It,.
67 The International Bank for
Reconstruction and Development ( World Bank) has established the
Intern'l-tional C.entre .for Settelement of Investment Disputes
promulgated under the Convention on 1;he Settlement of Investment
,
"
'
~
,Disputes between States and Nationals of Other States.
Unfortunately, thetatin Ani~rican cotintries have not acceded to
' ~urisdiction of >theWd~ld Bank Centre. 69
, . The United Nations may play an ' impol.'tant role in the
attempt to recover losses resulting
from expropriation. A 1962
.'
.~
'
Resolution of the General ' Assembly reads:
"the owner shall be paid appropriate compensation
in accordance with the rules in force in the
~states taking such measures in the exercise of its
. i~~ef..eMnty and in accordance with international
By implication .this means the U.N. recognizes that the act of a
.
-
sovereign will be balanced against principles of international
'law,. As ,seen above, the World Bank, . a specialized agency of the
U.N. has established its SID Centre. A very important part of the
U.N. is the International Court of Justice (ICJ), created in
:1945. 71 . Only U.N. membe.r s or other states tmo have a gr eed to
subject themselves to thE'! 'Statutesof the ICJ may be parties ' to
a suit • . The General Assembly and Security Council eleot :: the judges
for ' a term of nine years. Under
Arti~le
38(i) of the Statutes
'o f the International Court, international law is to be applied ih
each case, that law explained by the author in note 71, supra
as: "while international customary law is uncertain in some
respects, it is uncertain only in the same sense that American
. constitutional law ---
uncertain. It would be
is. ~necessarily
..iinpossible, --- for Ameracan lawyers to define . I due process of
,law l
---.
Yet American courts daily determine whether due process
has been met
II'.
72.
.
.
The ICJ may render · advisory opinions and it
may hear disputes if the parties have submitted to its jurisdiction•
.It heard the
~xpropriatory
.
••
.
problems involved in the Anglo-Itanian
p
Oil Company c ases of the~arlY 1950s. However, when the British
Goverment .requested ·aninterim injunction against Iran and the
court granted it. the ' U.N. Security Council refused to aid in the
.enfo~~ement
,
of the
ruling theI\eby n'lllifying any effect which
.
.the ·o,ecisioil may ,have had. Under the rules of the ICJ, judgments
are final and non-appealable, and only the Security Council
can at tempt to enforce the ;' juq.gmeilts, and under Article 2 of
the Charter to the ICJ, enforcement by "self h'elp" is not
allowed. As has been stated,·
.t
until the U.N. develops
the
·po\"er . and the determination to enforce the judgments of the
(ICJ) and to give effect to advisory opinions, the usefulness of
. the court remains dependent on the willingness of states to
comply with . such judgments a nd opinions ---. The very good record
of compliance with the court's decisions must be attributed in
.large part to the voluntary Mceptance of the court's jurisdiction"..: 73
Yet the United Nations could force compliance either by disallowing
the benefits of the . U.N. to any country who refuses to comply
with ICJ judgments, or the · World Bank could bring credit restraints
or threats to the disobeying .country; the deterrent effect of
either of these could only strengthen the basic ideas upholding
the U.N.'s purpose ---peaceful coexistence. 74
As illustrated in theChil~an disputes, the Uni t ed States
Government may· be reluctant .to dramatically attempt to force
compliance with .standards of fair comllensation. It has been said
"when the State intervenes to protect its nationals, it does not
easily forget its
oWn preoccupations
and it happens that its right
to intervene becomes a . favorable occa·s ion to pursue its political
designs"'.
75 There ·are the usual diplomatic endeavors, aid may
,
',: be. cut; and· credit restraints. "For the . lawyer .;. whether private
or in governm.ent .. an,1mportantrole -,: is to try to do the opposite
of what we learned in law school,.. that is not to look for the
principle to be derived from a particular dispute, but to look
for a particular issue that can be compromised, renegotiated
or paid for without either agreement on or compromise of
principle
n·.
76
The Overseas Private Investment Corporation (OPIC) may
offer some relief for the investor Whose property is
expropriated~
This program offers insurance in the case of expropriation if
'such "expropriatory action" lasts for one year. 77 .For example,
OPIC had insured certain loans made by Kennecott to the Chilean
Government for Elxpansion of the copper mines. In December, 1972,
OPIC paid Kennecott $66.9 million, almo·st the entire amount lost .
by Kennecott because of such loans. ?8; .Also :OPIC has its direct '
investment fund whereby it purchases convertible. debentures
sold by the foreigh .enterprise. Thereafter OPIC may resell these
debentures to the host country thus stimulating domestic interest
in the. success of the investment, or it may resell the debentures
to private investors. In any event this vehicle should not be
overlooked by an attorney with a forei gn investment minded client. 79
The International Bank, comp;J:.aillant, financed a corporation '
i
.
known as Exploma which was in the business of cutting and milling
lumber in the Dominican Republic. 80 ,OPIC insured these loans
under and Invesrtlment Guaranty
Contra6t~
The Dominican Government
nationalizedthe ' lumber. .industry and . the
International
Bank
.
.
;
instituted this arbitra.lproceeding,\:o ,r ecover its loss on the
"
36
-.
'.
loans. ,insured by OPIC. ' OPIC contended there was no "expropriatory
action" as ·required by the terms of the contract, therefore it
was not liable as insurer for any loss. The arbitrators held
there was no : "expropriatory action
It ,
by the ' Dominican Republic
for two reasons: Under the Contract of Guaranty, the action is
not expropriatory if it . is "reasonablr related to constitutionally
sanctioned goveriunental objectives ---, not arbitrary ---, is·
based upon a reasonable classification of entities, and (does
not). violate generally accepted international law principles ___ It'•
. And . since there was a "blanket c'o nservation measure --- aimed
at forestry and wa tershedprotectionlt', the taking was reasonable, .
at pp 1225-27. Secondly the investor was not deprived of the use
or control of his assets for more that one year.
It,
The purpose
of this 'one year' requirement seems to be to separate the
minor inconveniences and delays associated with governmental
regulations in all countries from the serious losses caused by
continuing action amounting to expropriation or confisc ation"', at
page 1228.
One .should also be aware of the Foreign Claims Settlement
Commission established in 1954,
II '
a domestic tribunal with
jurisdict.i on to ' adjudicate international claims "'. 81 It applies
" substantive principles of international law, justice, and equity,
(and) interprets these pr.inciplesin its 'o pinions which are
.
'.
.
... . .
82
precedents in. the
adjudication
of
future
cases
It".
For the sake
.
.of brevity, Iwill 'referthe reader t to the articles by Mr. Re
"
37
.
cited in the footnote 81, supra, a mu,.st reading for those
'interested in
the ' iritric~Cies
of the Foreign Claims Settlement
C,o mmission.
v.
Conclusion
One commentator has suggested eight " work-a-day" rules
which the pr;l.ctioner should consider: (1) a revocable franchise
'is preferred over a ' concession in all but natural resource
,investment contracts, both contracts ' stipulating payment of
:compensation in dollars, and payable upon temporary or perma"';
nent takeover, with provisions for loss of future profits,
. (2)
It
valuation ,of assets'" are to be kept current on company
ledgers, (3) if the investor foresees imminent expropriation,
sellout then rather than awaiting the inevitable, (4) use a
joint venture arrangement when possible, (5) be willing to accept .
a minority interest in the enterprise, (6) use leverage, i.e.
finance the investment with senior securities as well as common
stock, ' (7) use the insurance program OPIC, and (8) maintain good
relations with the host government. 83 .
Counsel can feel assured that , he has!jJlet his professional
duty if the contract as drafted eliminates all probabilities of
conflicts which ma'y arise under its terms, consequences are
relatively predictable, and the client has complete confidence
in the instrument. If. . expropriation
does occur,
.-.
. he should conside:o
the various problems liS set . out, in this article and vigorously
"
pursue tha:t whichall ' l.awyershope · tbachieve ,'" a. fair and equit.,i .
able rec,overy for his clien~.
FOOTNOTES
'1. The White House, A PolicY Statement on Economic Assistance
and Inve s tment Se curity in Developing Nat ions, 11 Int 11 • .
Leg a l Materials 239 (1972).
2. R.Keohane and V. Doorn Ooms, The Multinational Enterprise
and World Political Economy, 26 Intl1. Org. 84 (1972) •
. 3. S. Metzger, Developments in the Law and Institutions of
International Economic Relations. American Foreign Trade ,,;;,, :i
and Investment Polic for t e 1 Os: The William Commission
Report, . Am. J. nt 1. L. 37 1972.
' 4. II at 541-42.
'5. Id.
6.
Id at 546. As stat ed by the author and namesake of the
Hickenlooper," If a state determines that it desir es to place
all property under state-ownership, that is a sovereign right
of that state, and I will not encourage such action but
neither would I interfere. However, when a state expropriates
American property without meeting its obligations under international law to provide compensati on, then the Unit ed Sta tes
has a ·sovereign right to determine what it will do with
taxpayerls money in either giving or withholding aid to that
. state. No state has a right to our foreign assistance; if it
accepts our. assistance, then it must .also accept the con~itions
of that assistance, and cannot plead that by so doing its
. sovereignty is violated". In the heat of the Castro movement
the Hickenlooper was enacted. B.Hickenlooper, The International
Rights of propert; - Some Observations, 2 The International
. Lawyer 51, 59 (19 7).
7. Keohane and Doorn Ooms, supra 'at 91+.
8. D.S. Department of State, Bureau of Intelligence and Rese arch,
Study RECS-14, Nov. 30, 1971, Report on Nationalization.
Expropriation. and Other Takings of U~S. and Certain Foreign
Property Since 1960, 11 Int'l. Legal Materials 84 (1972).
9. II at 84, 8'5.
10.
1£1. at 8'5.
11. G. Eder, Expropriation3 . Hickenlooper and Hereafter, 4 The
International
Lawyer 61l (1970).
.
.
.
13.
A. Lowenfeld, Reflections on Expropriation and The Future
of Inve stment in the Americas, 7 The International Lawyer
116 (1973) • .
14. Note 16,infra.
15. Banco Nacional de Cuba v. Sabbatino', 376 u.s. 398, 440,
84 S. Ct. 923, 11 L. Ed. 2d 804, 830 (1964).
16.
' . 17.
M, 376 U.S •. at 447. By definition,"an act of state has been
said to be any governmental act in which the sovereign's interest
qua sovereign is involved", 376 u.s. at note 3, page 445.
Mr. Justice White said" the doctrine of nonreview ordinarily
applies to foreign laws affecting tangible property locat ed
within the territory of a government which is recognized by
the United States. This judicially fashioned doctrine of
nonreview is a corollar y of t he principle that ordinarily a
sta t e has jurisdiction to prescribe the rules governing the
title to property within its territorial sovereignty--- a
principle reflected in the conflict of laws rule, adopt ed
in virtually a l l nations, that the lex loc i is t he l aw governing
title to property.--- Our act ,state"'dOctrlne --- carries the
territorial concept one step further. It precludes a challenge
to the val1d;ity of foreign law on the ordinary conflict of
laws ground of repugnancy to the public policy of the
forum. Against the objection that the foreign act violates
domestic public policy, it has been said that the foreign
law provides the rule of decision, where the lex loci would
do indicate, in American courts"', 376 U.S •. at'iil+5, 446.
Id, ~ 376 U~S •.
at 453.
18 •. R. Falk, T~e Complexity of Sabbatino, 58 Am. J. Int'l. L.
935, 93b ( 964).
.
19. Sabbatino, supra, 376 U.s. at 407. This quotation · is taken
from a synopsis by the SUpreme Court of the District Court's
opinion.
.
20. Banco Nacional de Cuba v. Sabbatino. 193 F. Supp. 375, 384
( S.D.N.Y. 1961).
21. ' R. Falk, The Aftermath of Sabbatino, The Seventh Hammarskjold
Forum at 10 (1965).
22.SabbatiDo, supra, 376 u.S. at 413.
23. Id, 376 U.S. at 428. The Bernstein Exception evolved from
a-group of cases wherein the plaintiff, a Jew, alleged the
. .Nazi Government had seized his property unlawfully, to wi t~
. the Nazis imprisoned Bernstein and compelled ,plaintiff to
transfer all of his shares in Arnold Bernstein Line, a
German corporation which owned the ship Gandia. The first
case, Bernstein v. Van He~~hen Freres Societe Anonyme,
163 F. 2d 246 (2d Cir. 19 ) wherein Bernstein sued to
attache a debt owed to defendant, a Bel~ian corporation
which had acquired the ship, J. Learned Hand held t he
. New ·York Federal District Court could not hear the case
since the federal government had not given its consent to
allow a court to examine the acts of a foreign nation,
. even tho s e of Nazi Germany which the Nuremberg trials had ·
condemned as criminal. In the second suit, Bernstein v.
N.V. Nederla ndsche-Amerikaansche, 173 F. 2d 71 (2d Cir •
.1949), plaintiff sued Holland-American Line, a Dutch
. Company, for conversion of his assets. : He alleged that
de fendant knowingly accepted his interests in the Red
Star Line from the Nazi Government r such interests peing
. t aken from pla intiff while he was lmprisoned.
The court
. recogniz'e d that a Federal court:.Iid.$ht: hear such a case;
and at 210. F. 2d 37~( 2d Cir. 195~), under the same set
of facts, the court of appeals withdrew its mandate issued
to plaintiff since the. court received a letter from the
Department of State to the effect that the Executive· policy
. would be to allow American courts . to examine the merits
... 9f Germany's ac tion.
'
.
2kj..
Sabbatino, sU12ra, 376 U.S. at 433.
25.
li,
26.
Id, 376 U.S. at 472.
.27.
V.No ·Folsom,
'T
Law, 5'1 A.B.A.J.
376
U~S.
at 450..
Rule of Law or Rule of
•
. 28~77 Stat. 386-87 (1963), 22 U.S.C. Section 2370. (e) (1)
(Supp IV, 1962), 76 Stat 260-61 (1962).
29. 78 ' Stat 10.13,22 U. S.C. Section 2370. . (e) (2), P. L. 88-633 (1964).
30.~
Banco Nacional de Cuba v. Farr,383 .F. ,2d 166,185 (2d ,Cir. 19$7).
31.Id at 175.
32. Eder, sU12ra at 619-620..
33. Mat 621.
34. Id at 62~. See Bulletin. Department of State, November
., 17,1969, p. 411.
35. D. Furnish, Eder's Hickenloo er: Some
. Reg ardin~ Peru an
er atters, .
8"H
3
53:
(1.971).
. .
"
Lawyer
3
.
. .
'
37.406
u.s.
7'59,92 S. ct. '530, 32 L. Ed. 2d 466 (1972).
38.Sabbatino, supra, 376
u.s.
at 427-430.
39. See the Writ of Summonsf:l.li.ld by B. P. Exploration in the
,Civil Court of Syracuse J and set out in l' International
Legal Materials at 33'5 \1972).
40. , Judicial Decisions, 47 Am. J. Int'l. L. ' '509 (19'53). But see
An l o-Iranian Oil Co v. S.U.P.O.R. Co., (19'5'5) Int'l. L.
Rep. 23 C vil ' ourt of Venice· Anglo-Iranian Oil Co. v.
S.U.P.O.R. Co., (19'5'5> Int'l. L. Rep. 23 (Civil Court of
Rome).
41. Judicial Decisions, 47 Am. J. Int'l. L. 32'5 (19'53).
42. Wall Street Journai, July 19, '1 971, at 3, col. 2.
' 43. R. Lillich, International Law and the Chilean Nationalization 'T eValuation of the Copper Companies, 7 The International
Lawyer , 2,
9.
44. Wall Street Journal, Sept. 30, 1971, at 10, col. 2.
4'5. g, Oct. 14, 1971, at 10-, col. 3.
46. Id Sept. ,8 , . 1972, at 7, col 1.
-"
47. Id, Nov. 30 , 1972, at 29, col. 1.
48. , Id, Oct. , 31, 1972, at 13, col. 3.
49. Id, Dec. '5, 1972, at, 2, col 3.
'50. ~ .M, Jan. 23, 1973, at 8, col. 3.
'51 • Id, Feb. 26, 1973, at 14, col. 2.
'52. Id,
".
~ .
'53. Lillich, supra at 127.
'54.
'5'5. g at '593.
'56. B. Cheng, The Rationale"'of Compensation for Expropriation,
44 Grotius society 267, 293 (1958).
57.g at 300-305 • .
58. M. Bourquin, Arbitration and~nomi
15 The Business Lawyer _ O . 1 9-
"9. M
at 864-.
'60. Id at 862.
'. 61. W. Bishop, · Cases and Materials on International Law 811
· Od ed. 1 971 ) •
62. J. talive, ·Contract Between A State or a State
a Forei.gnCompanY, 13 Int'l. & Compo L. Q. 9 7 , .
See a!so F.Mann, State Contracts and. State Res onsibilit ,
· 54 .Am. J. Int'l. L. 2 9 0 regard ng the tort"" nvol ved
in the bre.ach of ~uch · contracts. :
.
63. Mat 994-.
64-.
M at
999, note 39.
65. ·· Bourquin, supra at 867.
66.' C. Norberg, Revitalization of Commercial Arbitration in
the Western Hemisphere, 3 The International Lawyer 109
( 1968-69) •
67.Id at 117-118.
68. " P. Szasz, Arbitration Under t e Aus ices of t e World
· ·,Bank. 3 The nternat onal Lawyer 312
9 - 9 wherein is
discussed this and other arbitral conventions. See also
Hynning, World Bank"s Plan for Settlement of International
.'. Disputes, 51 >A.B.A.J. 558 (1965).
.
.
69.
J~ Chiriboga, International Arbitration, 4- The International
Lawyer 801 (1969-70). '
.
70. Kalsi, supra ~t593 ~ ri~te 83.
71. A• • Larson,
e'stions and Ans "Ters on t e World Court, .
9(4).
'. World Rule o'f Law Center, Duke Un v. Law School
72.Id at 27.
73.
o.
Lissitzyn, The International Cburt of Justice 102, (1972).
74-. For an excellent technical illustration on procedures
in the ICJ .see S. Rosenne, The World Court. What It Is ~
How It Works, .Oceana Publications, New York, 1962; and for '
rec ent changes see E. Jimene.z de · Arechaga, The Amendments
to the Rules of Procedure of the International Court of
Justice. 67 Am. J. Int!r
• . Li···1.
: ( ~ 973)
• . ifof a brief discussion
,';..'; .
. .. .. .' ,. ' .
.", t · .
..
~
of the effect of the Connally Amendment which may bar
. adjudication of a controversy involving the United states
in the ICJ, see L~Summers, The Senate and the Arbitration
and Ad udication of International Dis utes, 3 The
International Lawyer
19 - 9 , also Larson, supra
at note 50. .
'
75. Bourquin, supra at 867.
76. Lowenfe1d, supra at 119.
,7 7. M. Mays, Overseas Private Investment Corporation ~M
Investment inthet\Americas. 7 The International Lawyer
132, 135 (1973). See also ·Ka1si, supra at 599-603.
78. Wall Street Journal, Dec. 15, 1972, at 6, col. 2.
·79 •. Mays, supra.
80'• . In the Matter of Arbitration between International Bank
and O.P.I.C., 11 International Legal Materials 1216 (1972).
81 • • E. Re, The Forei n Claims Sette1ement Commission: Com leted
Claims Program. 3 Va. J. Int'l. L~ 101 19 3 • For a direct
application see E. Re, The Foreign Cl,aims Settelment
Commission and the Cuban Claims Program, 1 The International
. Lawyer 81 (1966) and L. Sutton, American Claims Against Cuba,
. 3 The .International
'
.Lawyer 741 (1968-69).
82. Rej supra at 102.
83. Edel', · supra at . 640-6lf.5.