I NTERNATIONAL I NVESTMENT L AW 4 Expropriation and statutory taking

INTERNATIONAL INVESTMENT LAW 4

Expropriation and statutory taking

2Prof. Dr. Werner Meng - Europa Institut - Saarland University

• 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

Notion of Expropriation


• 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

Investment/Capital Asset – Asset based definition

• 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

Contractual rights as 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

Substantive definition of direct Investment


• Definitions– See the BITs, Art. 1110 NAFTA, Art. 13, 21 EnChTr, FTAs of the US

• Expropriations and Nationalizations (a series of expropriations)– 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)

Expropriation - Definitions


• 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 ->

Expropriation – Rights and duties of the states

• 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

Compensation

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”


• 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


• 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


• 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


• 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)

http://www.mfcr.cz/scripts/hpe/default.asp

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, anti-trust 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.

• 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

Newest discussions


• 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

Particular Problems of Statutory Taking

• 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)

Expropriations: Case Law

• 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

Oscar Chinn case

• 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.

Revere Copper v OPIC (1978)

• 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 .

Spörrung & Lönnroth v. Sweden 1982 ECHR

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 FactorsDugan 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

Documents

I NTERNATIONAL I NVESTMENT L AW 4 Expropriation and statutory taking