INTERNATIONAL INVESTMENT
LAW 4
Expropriation and statutory taking
Notion of Expropriation
• Special definitions in treaties
• General customary international law
– reference to national law (PCIJ Panevezys –
Saldutiskis) – minimum standard??
– Full taking
– Statutory taking, indirect expropriation (disputed)
• Devaluation of the value to use the property
• Transfer of control to the state (disputed)
• Property taking or invalidating
– Newer term: investment
Prof. Dr. Werner Meng - Europa Institut - Saarland University
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Investment/Capital Asset – Asset based definition
• German Model Treaty (GMT) Article 1:
– For the purposes of this Treaty
• The term "investments" comprises every kind of asset, in particular:
• (a) movable and immovable property as well as any other rights in
rein, such as mortgages, liens and, pledges;
• (b) shares of companies and other kinds of interest in companies;
• (c) claims to money which has been used to create an economic value
or claims to any performance having an economic value;
(d) intellectual property rights, in particular copyrights, patents, utility
model patents, industrial designs, trade-marks, trade-names, trade
and business secrets, technical processes, know-how, and good will;
• (e) business concessions under public law, including concessions to
search for, extract and exploit natural resources;
• Energy Charter Treaty Article 1 no. 6: similar
• Art. 1139 NAFTA
– Not: claims to money and concessions under public law
• In sum: FDI and portfolio investments
Prof. Dr. Werner Meng - Europa Institut - Saarland University
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Contractual rights as investment
• Most of the investment treaties comprise contractual
rights under the term of investment
• But there is only an expropriation if the state Partner
acts in an official and governmental capacity and in
the form of an executive or legislative act.
• Single breaches of contract by the state are not
expropriations
Substantive definition of direct Investment
• Direct investment only:
–
–
–
–
–
A certain duration of the operation
A regularity of profit and return
Assumption of risk
Substantial commitment
(Significance for the host State‘s development)
• All the other forms of investment without personal
involvement in the administration of the target are
so-called Portfolio Investments
Prof. Dr. Werner Meng - Europa Institut - Saarland University
5
Expropriation - Definitions
• Definitions
– See the BITs, Art. 1110 NAFTA, Art. 13, 21 EnChTr, FTAs of the US
• Expropriations
expropriations)
and
Nationalizations
(a
series
of
– Direct: formal taking of all property rights
– Indirect: „statutory takings“, „measures tantamount to expropriation“
(4.2 MT, 1110.1 NAFTA)
– Measures of similar effect as expropriations or naturalizations (13.1
EnChT) – particular category? De facto or creeping expropriation?
– Concepts are still not completely clear (Tecmed Case ICSID
ARB(AF)/00/2 of Mai 29, 2003)
• Partial expropriations of particular rights (licences e.g.)
• Expropriation must last at least for a longer time (1 year, 18
months e.g.)
• „Creeping expropriation“ happens in consecutive steps that
amount together to be on the level of an expropriation
(Generation Ukraine v Ukraine, Tradex v. Albania, Siemens v.
Argentina)
Prof. Dr. Werner Meng - Europa Institut - Saarland University
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Expropriation – Rights and duties of the states
• A state has a right to expropriate
– If national law allows for that
– If limits of public international law are observed
• Human rights rules
• Public reasons or for the common good
• Not discriminatory
– Most favored nation treatment
– National treatment (but minimum standard for aliens, against the
„Calvo Clause“, is the basis of every BIT)
• Due Process (Minimum standard or FET, no separate requirement)
• Compensation ->
Prof. Dr. Werner Meng - Europa Institut - Saarland University
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Compensation
• Hull formula (1938): full / adequate, prompt, effective
– Confirmed by treaty practice
• 1974: Charter of Economic Rights and Duties of States
– Sovereign right – appropriate compensation
– But: no opinio iuris
– Full market value (art. 4.2. MT)
• Discounted cash flow method
– preferable the book value or replacement value if there is already income
of the going concern
• Liquidation value before profitability
• What, if expropriation is illegal (no compensation,
particularly for indirect expropriations)
– Compensation following the Hull formula, i.e. market value at
the time of taking. Or
– Consequence of state responsibility: restitutio in integrum, i.e.
market value and lost profits
Statutory Taking: the notion
• Interference of the state with the use of property without taking
the whole position or title (Starret Housing v. Iran, Tippetts v. Iran,
Tecmed v. Mexico)
• A „substantial permanent deprivation of the investment“ (Suez v.
Argentina)
• When does that happen without triggering the duty to
compensate? (Feldman v. Mexico)
• What is a „legitimate public purpose“ that may justify such
interference?
• When is such an interference nevertheless an expropriation?
– An indirect taking, creeping or de facto expropriation, a measure
„tantamount of expropriation“
– Indirect expropriation vs. non-compensable regulation
• Is a „case by case analysis“ appropriate and sufficient?
Basic questions
• Who pays for limitations of the use of private property?
– The individual (limitations, that have to be tolerated)
– The state (limitations, that have to be compensated)
• Who has a profit from the limitations?
– The common good? I.e. limitations of private property in favor of all
the other private persons and their rights
• i.e. a delimitation of the property rights of the individuals
– The state as an economic actor?
• Were there individual expectations that were disappointed?
– General binding of property in the society?
– Promises etc. ….. ?
– Normal changes in legislation towards everybody in the state?
• Is the qualification referring rather to the effect or to the intention
of the state?
Indirect expropriation
• Treaties, that mention it as equal to direct
expropriation, and therefore underlying the same
limitations than direct expropritions
– BITs of France, the UK and the old US BITs (indirect,
tantamount, equivalent effect
– The World Bank Guidelines (sec. IV (1), „expropriation
and unilateral Alterations or Termination of Contracts“
(measures which have similar effects)
– Art. 13 EnChT (effect equivalent to nationalization or
expropriation)
– Art. 1110 NAFTA (measure tantamount to nationalisation
or expropriation)
Non-compensable property
regulation - 1
• Art. I 1st additional protocol to the ECHR:
• “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 proceeding provisions shall not, however, in any
way impair the right of a state to enforce such laws 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”
Non-compensable property
regulation - 2
• 1961 Harvard Draft Convention on the
International Responsibility of States for
Injuries to Aliens
– Execution of tax laws
– Change in the value of currency
– Mainenance of public order, health or morality
– Valid exercise of belligerent right
– Actions incidental to the normal operation of the
laws
Non-compensable property
regulation - 3
• 1967 OECD Draft Convention on the
Protection of Foreign Property
• The duty not to expropriate even in an
indirect form only prohibits normal takings.
• It does not apply to normal and lawful
regulatory measures
• It applies only to misuse of such regulation,
by intent and result
Non-compensable property
regulation - 4
• Restatement of the Law Third, the Foreign
Relations of the United States,” American Law
Institute, Volume 1, 1987, Section 712, Comment
g.
• Not: bona fide general taxation, regulation,
forfeiture for crime, or other action of the kind
that is commonly accepted as within the police
power of states, if it is not discriminatory
• Yes: if it is confiscatory, if it prevents,
unreasonably interferes with, or unduly delays,
effective enjoyment of an alien`s property or its
removal from the state`s territory
Non-compensable property
regulation - 5
• MAI Negotiating Text (DAFFE/MAI(98)17 of
May 4, 1998, Annex 3, Article 3
• A contracting Party may adopt, maintain, or
enforce any measure that it considers
appropriate to ensure that investment
activity is undertaken in a manner sensitive
to healthy, safety or environmental concerns
provided that such measures are consistent
with this agreement
Aspects of differentiation
• Degree of interference with the property right
– Severe economic impact
– Duration of the regulation
– Economic impact as the exclusive criterion?
• Character of governmental measures, the
purpose and the context of the governmental
measure
– In particular: the police powers of the state
• Interference of the measure with reasonable
investment-backed expectations
• Retainment of control by the proprietor militates
considerably against expropriation (Sempra v.
Argentina, Tokios Tokeles v. Ukraine, Azurix v
Argentina, LG&E v Argentina)
Degree of interference - 1
• ECHR:
– if the investors rights have been not irreversibly deprived, but only reduced
in time, there is no `deprivation`.
• Handyside v. United Kingdom, 24 Eur. Ct. H.R. (ser.A) at 29 (1976); Poiss v. Austria, 117
Eur. Ct.H.R. (ser. A)84, 108 (1987); Matos e Silva, Lda v. Portugal App. No. 15777/89, 24
Eur. Ct. H.R. rep. 573, 600-01 (1996).
– Land use regulations may reduce some substance of the property right, but
it does not completely take it away
• Sporrong and Lönnroth v. Sweden
• Iran-US Claims Tribunal
– Appointment of iranian managers may be expropriation per se (Starret
Housing Corp. v. Iran, 4 Iran-United States Cl. Trib. Rep. 122, 154 (1983) or in
their concrete activities (Tippetts v. TAMS-AFFA Consulting Engineers of Iran,
6 Cl. Trib. 219 (1984).
– No expropriation, if a bank account remains in existence and available in
`rials`, at the disposal of the owners (Sea-Land Service Inc. v. Iran, 6 Cl. Trib.
Rep.149 (1984).
Degree of interference - 2
• NAFTA decisions:
• Export quotas do not completely prevent sales and profits
(Pope & Talbot, Inc v.Canada, Interim Award (June 26,
2000), paras. 96-98
• Bans of waste exports for a certain time are regulations,
not expropriations (S.D. Myers, Inc. v. Canada, (November
13, 2000) Partial Award, 232. International Legal Materials
408, para. 232)
• Denial of export tax refunds for cigarettes may render
exports impossible, but they do not remove every
possibility of business activity (Marvin Feldman v. US,
ICSID Case No. ARB(AF)/99/1, Award of 16 December
2002, pp. 39-67
Degree of interference - 3
• Expropriation, if a company is left with its assets,
but without a chance of business (CME
(Netherlands) v. Czech Republic (Partial Award)
(13 September, 2001) at
www.mfcr.cz/scripts/hpe/default.asp
• Royalties increased against a stabilisation clause
which make further business unprofitable
amount to an expropriation (Revere Copper &
Brass Inc. v. Overseas Private Investment
Corporation, 56 International Legal Materials
258)
Degree of interference - 4
• ECJ:
• Hauer v Land-Rheinland-Pfalz [1979] ECR 321
• A prohibition to plant wine valid for three
years alone does not amount to a taking of
property
Solely the effect or also intention?
• Tippets case: the intent is less important than the effect (see
above)
• Phelps Dodge case: good reasons do not remove the duty to
compensate (Phelps Dodge, 10 Iran-United States Cl. Trib. Rep. at
130)
• If there is a statutory taking, the motivation or the intent are not
important (Metalclad Corporation v. United Mexican States
(Tribunal Decision August 30, 2000).
• Even a good environmental purpose does not remove the duty to
compensate (Compañía del Desarrollo de Santa Elena S.A. v.
Republic of Costa Rica, ICSID Case No. ARB/96/1 (February 17,
2000).
• In the ECHR the public intention plays a role. The US model Bits
also ponder the economic effect and the public objective of
protecting legitimate public welfare.
• Public purposes only play a general role for particular kinds of
public decision as laid down in the investment treaties
General governmental measures
• Promotion of social purposes or general welfare, antitrust measures, environmental protection, controls of
exports and imports, professional regulations,
inheritance rules or land planning are no takings of
property
– See the jurisprudence of the ECHR, Sporrong and
Loennroth; James etc.
• Proportionality necessary (Tecnicas Medioambientales
Tecmed S.A, v. The United Mexican States, ICSID
Award Case No. ARB (AF)/00/2)
• Is the police power of a state generally a justification
to deny a taking (Restatement Third, Tecmed)
Disappointing reasonable
expectations ?
• PCIJ Oscar Chinn, 1934 P.C. I. J. Ser A/B, no 63:
– “No enterprise…can escape from the chances and hazards resulting from
general economic conditions. Some industries may be able to make large
profits during a period of general prosperity, or else by taking advantage of a
treaty of commerce or of an alteration in customs duties; but they are also
exposed to the danger of ruin or extinction if circumstances change. Where
this is the case, no vested rights are violated by the State”.
• Starett Housing (loc.cit.):
– “Investors in Iran, like investors in all other countries, have to assume a risk
that the country might experience strikes, lock-outs, disturbances, changes of
economic and political system and even revolution. That any of these risks
materialised does not necessarily mean that property rights affected by such
events can be deemed to have been taken”.
• Methanex v. United States (2005) : Changes in the environmental
regulations in Califormia must have been foreseeable for a Canadian
investor.
• In other cases justified expectations not only relating to legal norms, but
also to assurances etc. played a considerable role, see (Metalclad v
Mexico, Tecmed v Mexico, Thunderbird v. Mexico, Azurix v. Argentina)
Clauses in the newest US BITs and
FTAs
• Economic impact, reasonable expectations, character
of governmental action.
• Non/discriminatory regulatory actions by a
government which are designed and applied to
protect legitimate public welfare objectives, such as
public health, safety and the environment, do not
constitute indirect expropriations
• Police power excluded in US model Bits
• Same in the Canadian model FIPA
• If the State did not undertake particular obligations
towards the investor.
• But the national treatment principle does not play any
role in investment law.
Newest discussions
• Particularly with concern to the TTIP negotiations
between the EU and the US the problem is extremely
disputed wether the public law decisions of a state
should be reviewed by an arbitral tribunal, thereby
limiting the freedom of the state to regulate its own
affairs
• Philip Morris Hongkong v. Australia case
• Vattenfall v. Germany case
• See later: ISDS
Particular Problems of Statutory Taking
• Individual protection vs. Public policy goals
• PIL does not know any social obligation of property
• Therefore no general duty to tolerate property interferences
for public reasons
• Compensation due, if rentability of the investment is lost
• Do foreigners have any duty of solidarity?
• Does the duty to compensate deter states from pursuing
public goals?
• There is no duty to attack the taking in the first place, owners
can immediately sue for compensation
Prof. Dr. Werner Meng - Europa Institut - Saarland University
27
Expropriations: Case Law
• Installation of a state administrator (Iran-US-Claims tribunal)
• Refusal of an authorization to produce because of a recent
declaration of a territory of natural (cacti) protection is an
indirect expropriation (ICSID, Metalclad v. Mexico,
ARB(AF)/97/1 of August 30, 2000)
• Withdrawal of free – zone license through the prohibition of
the import is an indirect expropriation (ICSID Middle East
Cement Shipping v. Egypt 2002)
• In Biwater Gauff v Tanzania (2008) the termination of a lease
in the water and sewage sector per se was not alone
considered indirect expropriation, but together with the
accompanying campaign against the investor in the public.
Similar Vivendi v. Argentina (resubmitted) (2007) and Suez v.
Argentina (2010)
• Not: prohibition of an additive to gasoline that is endangering
human health (Methanex NAFTA arbitration 2005, prohibition
of exportation of poiso waste)
Oscar Chinn case
• PCIJ 1934
• British shipping company on the Congo
• Competitor favored by the Belgium Company
(minimum prices, subsidies)
• PCIJ: not taking. Only favourable business conditions
and good-will, that may change in business
Revere Copper v OPIC (1978)
• Revere invested in the baxite mining in Jamaica. The
taxes and royalties were fixed for 25 years.
Nevertheless Jamaica raised the payments to be
paid, so that Revere had to finish ist operations. It
claimed the compensation from OPIC, an american
investment insurance.
• Was it an „expropriatary action“?
• The tribunal affirmed, since Revere lost the effective
control over using his property.
Spörrung & Lönnroth v. Sweden 1982 ECHR
•
This Case Arose under The First Additional Protocol To the
European Convention For the Protection Of Human Rights and
Fundamental Freedoms
• Two Swedish Persons Had Real Estate In Stockholm. This was
the subject to a long – term expropriation permit of the
Swedish government to the city of Stockholm. Finally, the city
renounced on its construction plans. The owners claim
compensation, since they could not sell their property to the
type the time of the validity of the permit.
• The court refused to find an indirect expropriation since the
owners could still decide on their property, although it may
have become more difficult. But it denied the fair balance
between the public interest and the individual right because
of the inflexibility of the Swedish legislation
• Therefore there was a violation of the protocol .
Goetz v. Burundi 1999
• Antoine Goetz v. République du Burundi ARB/95/3 (ICSID)
• Production and marketing of precious metals in Burundi by 6
belgian Investors
• Grant of a „free zone license“. Exemption of taxes and customs.
Withdrawn after two years
• No expropriation, but „similar effect“
• Losses, economic urge to cease activities, i.e. similar to a taking
• Conditions: „public utility, security or national interest. Measures
adopted according to legal procedures. Not discriminatory, not
contrary to any particular agreement. Adequate and effective
compensation: commercial value on the day before the measures,
promptly paid, freely transferable.“
• Here: no compensation was yet paid. Payment necessary, otherwise
duty to reinstall the investment
Repetition: List of Factors
Dugan et al., Investor-State Arbitration (2008), 455 ss.
• The Effect of the Government Measures
• Intent, purpose, nature or character
• Degree of reliance on government representations
And less often the following aspects
•
•
•
•
Duration of the effect
Domestic remedies sought by the investor
Validation of the gov‘t act by domestic courts
Transfer of the investment to the state or by it