CASE 1: Alpha lmt versus State of Omega
LAW FIRM (Group 4): Olivia Pope & Associates (Giannini Alice, Federico Rosario, Barbieri Eleonora,
Sarić Maša, Adebiyi Michael, Stagnini Aurora, Pantazi Theodora, Alva Pennanen)
Facts of the Case
This case deals with a 30 year long dispute between Claimant Alpha lmt and Respondent State of Omega.
The controversy concerns the actions following the expropriation of an area in Omega’s territory named Pink
Area carried out by Omega’s government in 1980.
Claimant states that this was an act of direct expropriation which gave rise to the right to fair and full
compensation calculated without regard to any current legislation or regulation after the 1980 expropriation
decree. Furthermore, Claimant requested a compensation of $ 41,200,000 based on an appraisal (the “Grey
Appraisal”) which takes into account two factors: the current fair market value and the highest and best use
of most of the property as a resort or other tourist related destination.
Applicable law
OMEGA acceded to the Washington Convention in 1993. Since then, the ICSID has efficaciously resolved
OMEGA cases about land expropriation and investment. So the line of reasoning followed, in terms of which
law can be applied to the dispute, can start with focusing on the Article 42 (1) of the ICSID Convention:
The tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the
parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State
party to the dispute and such rules of international law as may be applicable.1
Attention should be paid to the following points:
1 First sentence: if there has been an agreement between the parties, the applicable law will be the one they
chose;
2 Second sentence: if the first way is impossible, the applicable law will be that of the Contracting State
party, so the law of Omega.
The Claimant, taking into consideration the second sentence of Art. 42 of the ICSID Convention, submitted
that:
i) the Tribunal must apply the law of OMEGA to the issues in dispute;
ii) rules of international law are to be applied only in the event of a lacuna in OMEGA's law or if
such law is inconsistent with the international law principles of good faith and pacta sunt servanda;
iii) In the present case, there is no such inconsistency, with the result that the Tribunal should apply
OMEGA's law, though "...the result would be the same if principles of international law were
applied".
Consider now point 1: in the respondent’s point of view, international law applies to the merits of the dispute
by virtue of the parties’ agreement. That agreement, although not in writing or even stated expressly, finds its
sources in:
- 24 March 1997 OMEGA's consent to ICSID jurisdiction;
- 15 May 1997 ALPHA LIMITED's request for arbitration.
1
ICSID Convention, Regulation and Rules, available at https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/partAchap04.htm
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Both of these incorporate a description of the dispute found in certain reports prepared in the U.S. Senate
according to the “Helms Amendment”. According to the respondent, it’s implicit that there is a common
desire to determine compensation owed to the Claimant in accordance with international law, as provided by
the Helms Amendment.
The arbitral tribunal therefore concluded that the matter should be governed by international law since the
principles of Omega’s law are coherent with principles of public international law relating to the matter.
Discussion
According to international law we can distinguish between two different kinds of expropriation:
direct expropriation and indirect expropriation. Thus, we can identify a third category of measures called
regulatory measures. In some instances, an act or measure of the State taken in the exercise of the State’s
police powers or its right to regulate in the public interest can lead to a significant impairment of businesses.2
As stated in the CME (the Netherlands) v. Czech Republic, “regulatory measures are common in all types of
legal and economic systems in order to avoid use of private property contrary to the general welfare of the
host state”3.
The police powers of a State must be understood as “encompassing a State’s full regulatory dimension.”4
The question is: what is a legitimate and bona fide regulatory (thus non-compensable) act of State police
powers that justifies a complete deprivation of property without a corresponding obligation to pay
compensation and does this describe the case at hand? 5
The boundaries which define what differentiates regulatory measures from indirect expropriation have never
been clearly articulated, therefore the approach emerging from arbitral decision, state practice, jurisprudence
and international agreements has always been a case by case one.
As written in Article 8 of the General Conditions of Guarantee for Equity Investments for MIGA
Contracts of Guarantee6:
No measure shall be deemed to be expropriatory if it constitutes a bona fide non- discriminatory
measure of general application of a kind that governments normally take in the public interest for
such purposes as ensuring public safety, raising revenue, protecting the environment, or regulating
economic activities, unless the measure is designed by the Host Government to have a confiscatory
effect such as causing the Guarantee Holder to abandon the Guaranteed Investment or sell it at a
distressed price.
Some treaties have introduced definitions of regulatory measures, such as the Colombia – India BIT (2009):
Non-discriminatory regulatory actions by a Contracting that are designed and applied to protect
legitimate public welfare objectives including the protection of health, safety and environment do not
constitute expropriation or nationalization; except in rare circumstances, where those actions are so
severe that they cannot be reasonably viewed as having been adopted and applied in good faith for
achieving their objectives.7
2
EXPROPRIATION (2012), UNCTAD Series on International Investment Agreements II, p. 12
CME (Netherlands) c. Czech Republic (Partial Award) (13 September, 2001) available at
www.mfcr.cz/scripts/hpe/default.asp
4
Supra n.1, p. 79
5
The Boundaries of Regulatory Expropriation in International Law (2005) 20:1 ICSID Review – FILJ (forthcoming),
p.2
6
28 I.L.M. 1233 (1989)
7
Article 6.2.c of the Colombia-India BIT (2009), available at: http://arbitrationlaw.com/files/free_pdfs/colombiaindia_bit.pdf
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2
No such definition was included in any of the legal agreements between the State of Omega and the United
States of America.
Arbitral tribunals have also recognized that regulatory measure do not give rise to compensation. In Saluka
Investments v. Czech Republic, the tribunal stated that:
“[i]t is now established in international law that States are not liable to pay compensation to a
foreign investor when, in the normal exercise of their regulatory powers, they adopt in a nondiscriminatory manner bona fide regulations that are aimed at the general welfare.”8
We can distinguish between regulatory measures and lawful direct expropriation :
A “regulatory taking”, […] arises where government legislation or a regulatory measure deprives a
property owner of the use or benefit of property, limits or prohibits the transfer or disposition of
property or has the effect of destroying the value of property, but where the state does not acquire
title to the property in question. Regulatory expropriations, therefore, differ from typical cases of
expropriation, such as the taking of property for a highway or other public projects.9
The Pink Area has become part of a Park (The Yellow National Park) and therefore not property of the State
but of the population of Omega.
Going back instead to the main question, i.e. the criteria of distinction between regulatory measures and
indirect expropriations, it is relevant first to understand what unlawful expropriations entail.
Indirect expropriations are treated as internationally wrongful acts which are condemnable and, for
preventive reasons, should entail consequences other than lawful acts even if both produce detrimental
effects. Therefore the expropriating State has to provide full reparation within the meaning of Art. 31 ILC
Articles on State responsibility. This includes the financially assessable damage including loss of profits
under Art. 36 ILC Articles and, where appropriate, interest.
Even in cases of internationally wrongful acts interest is the exception and is awarded only in very peculiar
cases: when it’s an vital factor to provide a full reparation. This happens because in principle compensation
entails only the reparation of the damage and not the creation of wealth. According to article 38(2) of the
ILC Articles on State Responsibility, the interest runs from the date when the principal sum should have
been paid until the day the obligation to pay is fulfilled.
The recognition of the unlawfulness of state regulation is process which is taken in retrospect: it’s the
tribunals’ task to decide whether a regulatory measure can be deemed expropriatory or not.
Many tribunals, when distinguishing between regulatory measures instead of focusing exclusively on the
“sole effect” of the measure on the owner of the “expropriated” property, have also often taken into account
other factors to determine whether compensation was due.
We can distinguish here between two approaches: the one focusing on the purpose of the regulatory measure
and the one focusing on proportionality.
A number of cases were determined on the basis of recognition that governments have the right to protect,
through non-discriminatory actions, inter alia, the environment, human health and safety, market integrity
and social policies without providing compensation for any incidental deprivation of foreign owned property.
If we take into consideration the first approach mentioned, In Methanex v. USA, the tribunal stated:
8
Saluka v. Czech Republic, Partial Award, 17 March 2006, para. 255.
Regulatory Expropriation, Investment Protection and International Law: When Is Government Regulation
Expropriatory and When Should Compensation Be Paid? (1999), Thesis for the degree of Master of Laws
Graduate Department of Faculty of Law, University of Toronto, available at:
http://italaw.com/documents/RegulatoryExpropriation.pdf
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“As a matter of general international law, a nondiscriminatory regulation for a public purpose, which
is enacted in accordance with due process and, which affects, inter alios [sic], a foreign investor or
investment is not deemed expropriatory and compensable unless specific commitments had been
given by the regulating government to the then putative foreign investor contemplating investment
that the government would refrain from such regulation.”10
The state of Omega has never given any kind of special commitment to the United States of America
concerning its regulation and therefore it was never obliged to refrain from regulating for environmental
reasons.
It is important to stress how this approach is strictly related to the fundamental values a State needs to
protect.
If we would look at the only “effect approach” it would be forgotten to differentiate what’s substantially
different, breaching one of the general principles of law which has not to be overlooked.
The reasonable consequence of our legal reasoning is that looking at the mere effect the act does not take
into consideration that the protection of environment and animal species is substantially different from the
protection of an investment.
It would be a defeat for the development of social and environmental responsibilities that the international
community is bringing on at the present time, other than of an international civilization not to recognize this
ontological difference between values.
The second approach deals with the proportionality between the effects of the measure on the interests of the
investors and the public interest protected: Omega’s regulation was absolutely proportionated to the situation
of severe danger in which the flora and fauna of Omega were at the moment of the 1980 Decree.
Our client acted in completely good faith and as our witness will prove, the measures had to be taken
because of the fragility of the ecosystem in question.
If other means of preserving the Pink area would have been possible Omega would have taken without
hesitation but that is not the case.
Therefore after looking at the proportionality approach the claim of Alpha lmt results as inconsistent.
In response to Claimant’s request, Omega is willing to offer as a settlement a sum of $ 1,919,942 out of
good faith and of its strong intentions to continue engaging profitable commercial relations with foreign
investors.
The sum of $ 1,919,942 was established through an appraisal, namely the “Blue Appraisal”, conducted by
the esteemed Professor Plum, one of the greatest experts on the field of international investment and
environmental law. His evaluation took into account many complex factors, first of all the environmental
significance of the specific area.
In absence of international law rules defining the rules of procedure to follow in case of a State willing to
compensate for the application of a regulatory measure, the methods applied were those provided for lawful
expropriation. International practice says that with regard to (lawful) expropriations the valuation date for
assessing the amount of compensation is the moment where the taking occurred.
Pink area is terrain of over 30 kilometers of Pacific coastline, which comprises numerous rivers, springs,
valleys, forests and mountains. Furthermore, the Property is the natural habitat of hundreds of different rare
species both belonging to the animal and the vegetal kingdoms. Some of these are, stable populations of
large feline species such as pumas and jaguars.
Following the opinion of our expert, we believe that the best and also the only suitable use for the property is
conservation through its inclusion in the existing area of the Yellow National Park. If Pink area hadn’t been
10
Methanex v. USA, Final Award, 3 August 2005, part IV, chapter D, para. 7.
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incorporated into the Yellow National Park, the already mentioned feline populations would have been
seriously endangered and possibly result in an immeasurable loss for our natural heritage.
The sum of $ 41,200,000 requested by the claimant, calculated on the basis of the current fair market value
is completely inconsistent with the regulatory nature of this measure.
This case, as stated by the Arbitral Tribunal, has to be regulated by Omega’s law as far as the latter is in
accordance with the principles of international law. In case of inconsistencies, international law is to prevail
and a clear example of inconsistency is given by the means of appraisal of the property conducted by Alpha
lmt. Since it is a case of regulatory measure, fair and full compensation clearly goes against the principles of
international law:, Omega has no obligation to provide full reparation and consequently no interest should be
compensated.
Even if Omega’s law were to apply, the sum requested by the Claimant would be wrong since it’s based on
the convincement that the best and suitable use for the Pink Area is a commercial one. Omega’s existing
environmental law would significantly restrict or even prohibit a profit-making outcome from the Pink Area.
Thus, the value of compensation would be $ 2,965,113.68.
In conclusion, Omega wants to emphasize the absolute lack of discrimination in its regulatory taking: this
measure focuses on the environmental value of Pink Area and not on the nationality of the Alpha Limited
shareholders. The same measure would apply in case of a national company acting in the same area or in
case of investors of a different nationality than the one of Omega’s investors.
Conclusion
Omega is in principle not willing to provide any kind of compensation to Alpha lmt.
The act of Omega is a regulatory measure since it fulfills the requirements of public purpose, nondiscrimination and due-process. Since the measure cannot be considered an indirect expropriation, and
therefore not as an expropriation at all, no compensation has to be paid. Omega is although willing to give a
compensation of $ 1,919,942 to show good faith and for conserving future commercial relations. The claim
of compensation of Alpha Limited cannot be given any consideration when the act of Omega, in fact, is not
an expropriation.
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