Disputes on direct expropriation have been replaced by disputes related to foreign investment regulation and indirect expropriation. There is increasing concern that concepts such as indirect expropriation may be applicable to regulatory measures aimed at protecting the environment, health and other welfare interests of society.
It is true that the right of foreign investors to the protection of their investment often conflicts with the right of states to regulate within their boundaries.
The single most important development in state practice has become the issue of indirect expropriation. In this period of globalization, decreased official development aid and increased privatization and liberalization, formal expropriation has become anathema for developing state. The former concepts of economic decolonization and permanent sovereignty over natural resources have, in theory or in practice, been replaced by structural adjustment, good governance, export-led growth and vivid competition for foreign investment. The economic focus on private property notwithstanding, the need to protect certain public goods, such as a rate of economic adjustment which allows socially acceptable adaptation in area like employment and fiscal austerity, has remained, in varying degrees, on the political agenda of democracies in which political actors are held accountable and are elected within short legislative periods. The effect of global neoliberalism on the environment has been the subject of an open debate concerning the interplay between the hash consequences of life-threatening poverty, respect for the environment, the size of the public budget to afford environmentally benign action, and the growing concern of the general public for environmental policies in countries with increasing income. These competing concerns are to be assessed in the context of diminishing non-renewable natural resources and the spreading of methods of production and consumption that place additional stress on environmental system.
THE RIGHT TO EXPROPRIATE
Consistent with the notion of territorial sovereignty, the classical rules of international law have accepted the host state’s right to expropriate alien property in principle since a foreign investor operates within the territory of a host state; the investor and its property are subject to the legislative and administrative control of the sovereign state. There is no doubt that each state has the right to set its own rules of property which foreigner accepts when investing. Changes in internal policies of the political and economic conditions in host country could be brought about by several factors, such as; the exploitative nature of the business of the investor which may bring about the dreadful conditions of the local environment or public health, a change of government, political revolution, economic nationalism, or monetary crisis. As a result of these, the pressures will be put on the national government to protect or rearrange public benefit which may rise to the taking of property of a foreign investor.
For example, the sovereignty of a nation extends to its national resources. In most countries such resources are owned by the public and administrated by government. Public ownership necessarily implies that such resources will be developed in the public interest and for the public citizens of the nation.
United Nations declaration on the establishment of a new international economic order
the new international economic order should be founded on full respect for the following principles:
Sovereign equality of the states, self-determination of all peoples, inadmissibility of the acquisition of territories by force, territorial integrity and non-interference in the internal affairs of other states;
The right of every country to adopt the economic and social system that it deems the most appropriate for its own development and not to be subjected to discrimination of any kind as a result;
Full permanent sovereignty of every state over its natural resources and all economic activities. In order to safeguard these resources, each states is entitled to exercised effective control over them and their exploitation with means suitable to its own situation, including the right to nationalization or transfer of ownership to its nationals, this right being an expression of the full permanent sovereignty of the state. No state may be subjected to economic, political or any other type of coercion to prevent the free and full exercise of this inalienable right;
The right of all states, territories and peoples under foreign occupation, alien and colonial domination or apartheid to restitution and full compensation for the exploitation and depletion of, and damages to, the natural resources and all other resources of those states, territories and peoples;
The relevant principles for the purposes of the European Convention of Human Rights are included in Article
1 of Protocol 1. Though this article does not say so explicitly, it strongly implies that the duty to compensate is not applicable to normal regulation.
Every natural or legal person is entitled to the peaceful enjoyment of its possessions. No one should be deprived of his possessions except in the public interest and subject to the conditions provided for by the law and by the general principles of international law.
The proceedings provisions shall not, however, in any way impair the right of the state to enforce such law as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.
1) STABILIZATION CLAUSE
As regard to the legislative power flowed from the state sovereignty, the host state is able to change any event that took place within its territory or to affect any contractual right or right to property that is located within its territory, thus it is clear from this basis that the foreign company stands a disadvantage in any agreement it made with the host state. One of the method which limits the state sovereignty in contractual relations with foreign investor is to adopt a so called ‘stabilization clause’ in international investment contracts. This invokes the classical doctrine of ‘sanctity of contract’ as the state is bound by agreement contained in the clause not to apply any later changes to its law in particular contract or to alter the term of the contract directly by legislation. This clause also intended to immunize the foreign investment contract from a range of matter such as taxation, environmental control, and other regulations as well as to ensure that the contract would be operative for the full term provided in the contract. However, this area of law has never been fully clarified. One view is that these clauses may exclude any subsequent changes of host state law from operating upon the investment contracts. In other words, any amendments of law applicable to the investment contracts will be in violation of stabilization clause. Thus the original terms of the investment agreement at the time of entry of foreign investor are frozen from subsequent legal changes. On the other hand, an alternative view in favor of the sovereignty of the host state is that any changes of the law is permitted since the host state must act in public benefit but the host state will be accompanied by a duty to compensate the foreign company. Consequently, doubts have been raised as to whether the stabilization clause may not be able to achieve what is set out to do and the investor may not be protected against legislative uncertainty.
This controversial issue is further illustrated by the three arbitrations initiated by BP , Texaco and Liamco against expropriatory actions taken by Libya. In all three cases, the stabilization clause involved in the concession contracts was designed to protect them against regulatory changes. In the Texaco award, the effect of stabilization clause in an oil concession agreement between a US oil company and the government of Libya was to limit the state’s sovereignty in relation to its rights over natural resources for the limited period of concession. Therefore the tribunal decided that the government could not exercise its sovereignty to nationalize in violation of its specific contractual commitments in stabilization clauses, and the nationalization in the face of the stabilization clause amounted to a breach of the deeds of concession. However, the Liamco decision is somewhat confusing and considerably different from the Texaco decision. In the Liamco award, a stabilization clause will not affect the sovereign right to expropriate or nationalize which this violation of a contract is not unlawful under international law and the principle of pacta sunt servanda was qualified by the right of the state to expropriate subject to the obligation of compensation.
Likewise, he Aminoil arbitration concerned an expropriation dispute between a US oil production company and Kuwait. The tribunal found that its stabilization clause was valid and binding the government of Kuwait but that typical clause should not be presumed to imply that the host state lost the right to expropriate. The tribunal added that in the absence of the stabilization clause of this investment contract, the host state was not prevented from granting stability guarantees by contract but the tribunal required an express provision restricting the host state’s power of expropriation. Therefore, the Kuwait’s 1977 decree terminating the concession and expropriating Aminoil’s assets did not violate the stabilization clause of the original agreement and Aminoil was entitled only compensation for a lawful taking of its property interest. As a result of this case, it appears from the tribunal reasoning that the stabilization clause could not effectively restrict the host state’s legislative power.
As far as the absolute sovereignty of the host state particularly where the exercise of such power is subject to public good is concerned, it can be seen that the stabilization clause may not effectively serve its protective character to the foreign investor. The modern consequence of the classic stabilization clause aimed at prohibiting an expropriation is not to invalidate nationalization but to make it unlawful which in turn affects the amount of compensation. Dolzer and S’chreuer also commented that even clauses in agreements in the host state and the investor that freeze the applicable law for the period of agreement in international investment contracts will not necessarily stand in the way of a lawful expropriation. Moreover, according to Sornarajah, stabilization clause may not be possible in any case for the state to fetter its legislative power by contract made with private party as this may be unconstitutional.
2.) LAWFULNESS OF EXPROPRIATION
As mentioned above, it is recognized that the state has a right to control property and economic resources within its territory to develop its economic, political or other objectives. Such state measure must be accepted that the taking of property is prima facie a lawful exercise of powers of government. However, it is generally accepted that an expropriation is lawful if it satisfies certain conditions. According to the settled practice of what constitute a lawful expropriation, though terminology varies, it is conditioned on three or four requirements which normally contained in almost all treaties and also seen to be part of customary international law. For example these requirements are stated in American law institute restatement (third) of the foreign relations law of the United States:
Article 712(1): Economic Injury to National of Other States
A taking by the state of the property of a national of another state that is (a) not for a public purpose, or (b) discriminatory, or (c) not accompanied by provision for just compensation; for compensation to be just under this subsection, it must, in the absence of exceptional circumstances, be in an amount equivalent to the value of property taken, be paid at the time of taking, or with in reasonable time thereafter with interest from the date of taking, and in a form economically usable by the foreign national;
Another good example is Article 1110(1) of The North America Free Trade Agreement (NAFTA) with the following language;
No party may directly or indirectly nationalize or expropriate an investment of an investor of another party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (‘expropriation’), except:
for a public purpose;
(a) on a non-discriminatory basis;
(b) in accordance with due process of law; and
(c) on payment of compensation
2.1) Public Purpose
The measure should be served a clear and genuine public purpose not for the purpose of private gain. This concept of ‘public utility’ or ‘public use’ or ‘dominant public purpose’ is widely recognized and it is also embodied in the constitution of a number of countries as a justification of the taking of private property. For example, the state exercises its power of national economic policy in order to serve the enrichment of country. Moreover, where a taking is by way of reprisal against the act of home state of foreign national or if the property is seized in the course of committing crime against human right, it is considered illegal on the ground that it lacks public interest. Equally, where the taking is motivated by political concerns that are not directly relevant to the state’s economic policy, and is not justified by exceptional circumstances, it may be unlawful.
As far as the practice and the application whether the government measures are motivated by public purpose are concerned, there is little doubt that the requirement will be used as necessary for lawful expropriation but it is unlikely that it will constitute more than a subsidiary, throwaway argument for illegality. This view is reflected in the commentary of the American Law Institute’s Restatement on Foreign Relation Law. The commentary reads:
The requirement that a taking be for a public purpose is reiterated in most formulations of the rules of international law on expropriations of foreign property. That limitation, however, has not figured prominently in international claims practice, perhaps because the concept of public purpose is broad and not subject to effective re-examination by other states. Presumably, a seizure by a director or oligarchy for private use could be challenged under this rule.
In the Liamco award, arbitrator dismissed the argument based on the requirement of a public purpose in the following terms:
As to the contention that the said measures were politically motivated and not in pursuance of a legitimate public purpose, it is the general opinion in international theory that the public utility principle is not a necessary requisite for the legality of nationalization. This principle was mentioned by Grotius and other publicists, but now there is no international authority, from a judicial and other source, to support its application to nationalization. Motives are different in international law, each state being free to judge itself what it considers useful or necessary for the public good. […] The objective pursued by it is of no concern to third party.
The government measure should not discriminatory and arbitrary as it is unlawful under international law. By tradition, the requirement relating to the absence of discrimination was directly against racial discrimination of aliens on the basis of national or ethnic origin. Where the taking is ethnically motivated, it is clearly violative of the ius cogens norm against racial discrimination and hence illegal. However in modern practice, as the issue of regulatory takings becomes prominent, any taking that is pursuant to discriminatory or arbitrary action, or any action that is without legitimate justification, is considered to be contrary to the non-discrimination requirement, even absent any singling-out on the basis of nationality. Moreover, the non-discrimination requirement demands the governmental measures, procedures and practices are non-discriminatory even in the treatment of members of the same group of aliens. The issue of discrimination involves a comparison with the treatment afforded to domestic competitors, to other foreign investors in general. The basis principle of equality of treatment is in this issue. Thus any difference in treatment must objectively justifiable. In this respect, discriminatory treatment, that cannot be justified by reference to the host state’s economic policy, has been presumed to be illegitimate.
Compensation should be paid. As regards to this, it is also accepted in principle but there is no universal agreement relating to the manner of assessment of the due compensation. The more recent bilateral investment treaties (BITs) use the formula that payment should be prompt, adequate and effective compensation but other alternative formulas, such as just compensation are also be used.
Concerning the standard of compensation, the effect of the discrepancy of opinion iuris between the capital-exporting countries and the developing countries, as well as the significant of heterogeneous state practice not necessarily identical with any specific opinion iuris, raised issues regarding the formation and evolution of customary law in a setting of divergent opinions and practice.
2.4) Due process
Due process is an emerging trend in international investment agreement (IIAs) that deserves attention in the development of fourth requirement. an expression of the minimum standard under customary international law and of the requirement of fair and equitable treatment. Therefore it is not clear weather such a clause, in the context of the rule on expropriation, adds an independent requirement for the legality of the expropriation.
There is general agreement that a taking which lack a public purpose and discriminatory are illegal in international law.
Modern international law may give a certain margin of discretion to the host state in this area. However, it is not entirely clear whether this margin should be the same in all cases. Arbitral jurisprudence has mainly dealt with differences of treatment between foreign corporations processing the same or different nationalities. More problematic is the case of differing unfavorable to the foreign entity. Such treatment may violate the ‘national treatment’ standard which is presented in a number of bilateral investment treaties.
Another point of uncertainty is how …
In Feldman v Mexico, the arbitral tribunal held that ‘the conditions (other than the requirement for compensation) according to the NAFTA context are not of major important in determining expropriation’. It explained that:
In the tribunal’s view, the essential determination is whether the actions of the government constitute an expropriation or nationalization, or are valid governmental activity. If there is no expropriatory action, factor a-d are of limited relevance, except to the extent that they have helped to differentiate between governmental acts that are expropriation and those that are not, or are parallel to violations of NAFTA Article 1102 and 1105. If there is a finding of expropriation, compensation is required, even if the taking is for public purpose, non-discriminatory and in accordance with due process of law and Article 1105(1).
DEFINITION/ THE ABSENCE OF PRECISE DEFINITION
Protection against indirect expropriation has been included in various forms of international instruments. However, it is difficult to define with precision the situations covered by the concept since most of them stay mute on the features of the measure. It is not unreasonable to assume that the legal issues in the foreign investment context may be dominated by the definition of expropriation.
The starting point for interpreting general clauses intended to identify takings in international law is similar to the approach taken for interpreting broad principles in the jurisprudence of national courts, both in the interpretation of their constitutional rules protecting property and in allowing the exercise of legislative sovereignty in economic affairs. In past decades, various efforts have been made by prominent institutes and authors to summarize or codify the state of international law as it has evolved.
In order to provide clear guidance on the subject of expropriations, lessens should be learned regarding both the substantive……
1.) TAKING AND EXPROPRIATION
At this point it seems appropriate to add an observation with regard to terminology. The term ‘expropriation’ and ‘taking’, in the view of Reinisch, are interchangeable.
A distinction between the two terms is that nationalization involves a taking of foreign owned assets into state or public ownership, and often takes place in large-scale economic sectors whereas an expropriation would seem to have a broader scope in the sense that it does not necessarily imply the ownership has taken by the state, but instead that a deprivation has occurred because of an action taken by the state. As Higgins stated that;
Expropriation may affect an entire industry or individuals. Nationalization by contrast entails large-scale takings by virtue of a legislative or executive act for the purpose of transferring the interest into public-sector use.
The more general term ‘taking’ may be used to cover both cases.
2. LEGAL INSTRUMENT
Certain steps in that direction have been taken in some legal texts attempted by individuals or institutions.
As early as 1961, the so called Harvard Draft Convention on the International Responsibility of States for injuries to Aliens by Professors Sohn and Baxter set the tone for defining expropriation or the taking of foreign private property in the following words:
(a) A ‘taking of property’ includes not only an outright taking of property but also any such unreasonable interference, use, enjoyment, or disposal of property as to justify an interference that the owner thereof will not be able to use, enjoy, or dispose of the property with in a reasonable period of time after the inception of such interference.
(b) A ‘taking of the use of property’ includes not only an outright taking of property but also an unreasonable interference with the use or enjoyment of property for a limited period of time.
In the 1967 OEDC Draft Convention on the Protection of Foreign Property, an expropriatory act was defined as a measure that:
no party shall take any measure depriving, directly or indirectly, of his property a national of another party.
[…] as to deprive ultimately the alien of the enjoyment or value of his property, without any specific act being identifiable as out right deprivation. As instances may be quoted excessive or arbitrary taxation; prohibition of dividend distribution coupled with compulsory loans; imposition of administrators; prohibition of dismissal of staff; refusal of access to raw materials or of essential export or import licences.
The provisions on expropriation are quite common on investment treaties but their definitions appearing in the treaties are of such generality since they provide merely general reference to the term expropriation to parties or arbitral tribunals confronted by specific cases. Moreover, there is a visible reluctance to include a definition of expropriation in treaties. As Dolzer pointed out that;
The current version of investment treaties do not in any way illuminate the issue of indirect expropriations; they rather state the problem, and presumably the rule of general international law are meant to provide the solution. […] Such apparent reluctance to attempt a definition of ‘expropriation’ in the BITs may be explained by the fact that a host state, as is well known, can take a number of measures which have a similar effect to expropriation or nationalization, although they do not de jure constitute an act of expropriation, such measures are generally termed ‘indirect’, ‘creeping’ or ‘de facto’ expropriation.
A good example on a broad definition of indirect expropriation of the international level is Article 1110(1) of The North America Free Trade Agreement (NAFTA) with the following language;
No party may directly or indirectly nationalize or expropriate an investment of an investor of another party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (‘expropriation’), except:
for a public purpose;
(a) on a non-discriminatory basis;
(b) in accordance with due process of law; and
(c) on payment of compensation
It is clear in NAFTA that ‘expropriation’ is explained by reference to the verbs ‘expropriate’ and ‘nationalize’, though no indication is given as to the meaning of these words. It rather states the rule of general international law to provide the solution. Inclusion of both terms at least suggests a broad range of action to be proscribed, as does the express inclusion of words ‘directly or indirectly’ and the additional provision ‘or take a measure tantamount’. However there is no specific guidance in the instrument as to what constitutes direct as opposed to indirect expropriation, and how a ‘measure tantamount to nationalization’ differs from direct or indirect nationalization.
In the NAFTA context, the lack of institutionalized permanent tribunal and the absence of a NAFTA-wide nullification procedure have contributed to considerable jurisprudential heterogeneity presumably unsustainable in the long run. The effect has been to create additional incentives to bring law suits in hope of clarifying the state of law.
The language of Article 1110 on expropriation was expressed in the influential arbitral tribunal in Metalclad. After citing Article 1110 of NAFTA, the tribunal found a violation of this Article. The tribunal stated:
expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host state, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be expected economic benefit of property even if not necessarily to the obvious benefit of the host state.
This determination by the Metalclad arbitral decision is not with out controversy as to whether the Metalclad definition of expropriation is too broad for the purpose of Article 1110 to be reliable on its expansive nature of formulation as stated in the Supreme Court of British Columbia that:
The tribunal gave an extremely broad definition of expropriation for the purposes of Article 1110. In addition to the more conventional notion of expropriation involving a taking of property, the tribunal held that expropriation under the NAFTA includes covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property. This definition is sufficient broad to include a legitimate rezoning of property by a municipality or other zoning authority.
Additionally, the Metalclad definition deserves to be quoted not just because it reflects a recent broad effort to state the law, but also because it highlights a distinct line of thinking. Remarkably, the award laid down its definition without reference to any previous decision or codificatory norm, focusing strongly and exclusively on the effect of governmental measure on the alien owner.
The 1994 Energy Charter Treaty in its Article 13 provides that:
Investment or Investors of A contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation except where such Expropriation is:
(a) for a purpose which is in the public interest;
(b) not discriminatory;
(c) carried out under due process of law; and
(d) accompanied but the payment of prompt, adequate and effective compensation.
Unfortunately, the ECT contains some elements of ambiguity which had been carried over from the NAFTA model.
As regards to bilateral investment treaties, it is standard for modern BITs to contain an expropriation provisions to protect foreign investors from expropriatory actions as to maintain a vital purpose of BITs. However, such provisions usually do not provide anymore guidance to the parties (and arbitrators) than the multilateral investment discussed above.
The BITs generation appreciate that the foreign investment may be expropriated indirectly through ‘measures tantamount to expropriation or nationalization’, ‘measures having effect equivalent to nationalization and expropriation’, or ‘measure having similar effect’ in order to capture forms of indirect expropriation. This phase generally found in substance in almost all BITs. For example……. of ‘indirect’ expropriation. It can be seen as the innovation solution as a more realistic design in determining what constitute in direct expropriation. Essentially, the proposal of definition is to be broad and flexible since any measures regardless of forms which have the effect of depriving an investor of his management, control or economic value in a business may constitute an expropriation requiring compensation as Professor Reisman and RD Sloane have pointed out that:
This phase includes not only intentional and obvious indirect expropriation, nor only intentional creeping expropriation, but also a frequent form of taking in prior generation. It also captures the multiplicity of inappropriate regulatory acts, omissions, and other deleterious conduct that undermines vital normative framework created and maintained by BITs and by which government can, in effect but not name, now be deemed to have expropriated a foreign investment.
Arguably, such a wide definition of taking may not be acceptable in general international law for the reason that many normal activities of states, such as taxation, affect property rights cannot ordinarily be expected to give rise to claim of expropriation or scrutiny by international tribunals. As a consequence, it is difficult to assess whether an international arbitral tribunal would actually set a lower barrier to recovery for the investor claimant based on the notion that the investor had only to show some deprivation as opposed to a substantial deprivation since the absence of the word substantial might suggest that a complete deprivation is actually required, so that the barrier would be higher. The key point here is the potential flexibility and related uncertainty of the expropriation claim.
This view of BIT provisions among a wide range of states shows fluctuation of language over a fairly narrow range, and a marked reluctance on the part of contracting states to condescend to particulars. It is not possible to conclude that the differences in language are necessarily attributable to considerations specific to the contracting parties. Nor do they demonstrate deep doctrinal differences between states as to the extent of protection to be provided. However, there is clearly an accepted trend towards finding states potentially responsible for a broader scope of expropriatory action, while maintaining that the deprivation alleged must be very substantial, though not necessary complete. Decisions of international arbitral tribunals are therefore crucial in clarifying and refining the nature of modern expropriation claims.
As regards to the extent of such broader terms of expropriatory action, again, these terms do not offer direction as to the scope of indirect expropriation. The hint at the breadth or flexibility that the additional terms used with the word expropriation is now so familiar in investment instruments in order to provide the parties to have the opportunity to rely on a flexible definition of expropriation.
3. CONCEPT OF INDIRECT TAKING
3.1) Direct and Indirect Expropriation
In the early period, expropriation involved the direct seizure of physical property which belonged to the individual corporations of the foreign investor. Where such takings are direct, no issue of identification arises as arbitral tribunals have considered direct expropriation as being relatively easy to recognize since it is simply the transfer of legal title from the investor to host state. But, a characteristic of taking in the modern time is that there is no change affected to the rights of procession of the physical property of the foreign investor. There is a diminution of the investor’s property rights that is accomplished without dispossession necessarily taking place. An indirect expropriation leaves investor’s title untouched but deprives him of the possibility to utilize the investment in a meaningful way. It is only when the taking is indirect that difficulties arise. The different between a direct or formal expropriation and an indirect expropriation turn on whether the legal title of the owner is affected by the measure in question. Today direct expropriation has become rare. States are reluctant to jeopardize their investment climate by taking the drastic and conspicuous step of an open taking of foreign property. An official act that take the title of the foreign investor’s property will attract negative publicity and is likely to do lasting damage to the state’s reputation as a venue for foreign investment. As a consequence, indirect expropriations have gained in importance. A typical feature of an indirect expropriation is that the state will deny the existence of an expropriation and will not contemplate the payment of compensation.
In the past, the concern was only with the physical property of a foreign investor. In modern times, the concern is not so much with the physical property but with the antecedent rights that are necessary for the enjoyment of this property right. Most recent BITs include intellectual property with in the definition of investment.
3.2) Indirect Expropriation
It may be helpful to look at the view of the term and concept of ‘indirect expropriation’ by first consider what arbitral tribunal have held.
In Middle Eastern Shipping and Handling Co. v Egypt , indirect expropriation was described as ‘measures taken by a state the effect of which is to deprive the investor of the use and benefit of his investment even though he may retain nominal ownership of the respective right.’
In Lauder v Czech Republic the tribunal stated that such taking ‘does not involve an overt taking but effectively neutralizes the enjoyment of property’
It can be concluded that a state may interfere, without purporting to take title of property or a foreign investor’s commercial rights. A state may, for example, appoint an unreasonably intrusive government supervisor, or fix price for a commodity indispensable to the production process at a level that destroys an enterprise’s economic viability, or refuse to hold feckless administrators to account for failure to carry out their assigned tasks. A wide variety of measures including taxation, regulation, denial of due process, delay and non-performance, and other forms of governmental malfeasance, misfeasance, and nonfeasance may be deemed expropriatory if those measures significantly reduce an investor’s property rights or render them practically useless.
3.3) The different forms of indirect expropriation
As much as the concept of indirect expropriation is established in international law, there exist distinctions in wordings used to describe the numerous different forms in which these expropriations appear. These terms include for example ‘de facto’, ‘disguised’, ‘consequential’, ‘regulatory’, or ‘creeping expropriation’. Moreover, as discussed above, BITs often refer to ‘measure tantamount to’ or ‘equivalent to’ expropriation. The boundaries between these different forms of indirect expropriations are not clear. These distinctions certainly have provoked discussion as to whether, on one hand, a substantive difference in meaning should be recognized or, on the other hand, an emphasis on small variation in language is a misguided approach to the understanding of international law.
As mentioned above, in addition ‘indirect’, there are several terms used to be described such action. Various arbitral tribunals have sought to attempt to clarify these terms and define the extent to which they should be differentiated. In the recent decision applying Article 1110 of NAFTA, the tribunal seemed to take the approach the phase ‘indirect’ expropriation comprised various terms.
Generally, it is understood that the term’…equivalent to expropriation…’ or ‘tantamount to expropriation’ refers to the so-called ‘indirect expropriation’ or ‘creeping expropriation’, as well as to the above-mentioned de facto expropriation. Although these forms of expropriation do not have a clear or unequivocal definition, it is generally understood that they materialize through actions or conduct, which do not explicitly express the purpose of depriving one of rights or assets, but actually have that effect. This type of expropriation does not necessarily take place gradually or stealthily – the term ‘creeping’ refers only to a type of indirect expropriation – and may be carried out through a single action, through series of actions in a short period of time or through simultaneous. Therefore, a different should be made between creeping expropriation and de facto expropriation, although they are usually included within the broader concept of ‘indirect expropriation’ and although both expropriation methods may take place by means of a broad number of actions that have to be examined on a case-by-case basis to conclude if one of such expropriation action methods has taken place.
It sometimes refers to as ‘constructive takings’ so as to emphasis the idea that results akin to taking are produced though externally the situation remains unchanged.
3.3.1) Creeping Expropriation
The increase concern with ‘creeping expropriation’ in modern literature and arbitral awards is that a state could sometimes diminish property rights without affecting the direct ownership of the investment. It is the generally recognized that act of expropriation does not necessarily result a single act of finality which either takes away a right or diminishes an interest of foreign investor. Therefore, it has long been accepted that an expropriation may occur outright or in stages. In other words, it happens through a series of acts. It could be a slow, gradually by measure of taking of such rights and interests set in motion by an initial act and spreading over a course of time and eventually result in expropriation. The term is also described the incidence of ‘creeping expropriation’ which is defined by UNCTAD as ‘the slow and incremental encroachment on one or more of the ownership rights of a foreign investor that diminish the value of its investment’.
A number of arbitral tribunals have sought to elucidate these terms. One of the given descriptions is that:
As is well known, there is a wide spectrum of measures that a state may take in asserting control over property, extending from limited regulation of its use to a complete and formal deprivation of the owner’s legal title. Likewise, the period of time involved in the process may vary – from an immediate and comprehensive taking to one that only gradually and by small steps reaches a condition in which it can be said that the owner has truly last all the attributes of ownership. It is clear, however, that a measure or series of measures can still eventually amount to a taking, though the individual steps in the process do not formally purport to amount to a taking or to a transfer of title. What has to be identified is the extent to which the measures taken have deprived the owner of the normal control of his property.
Similarly, arbitral tribunals have also explained the following description of creeping expropriation:
Creeping expropriation is a form of indirect expropriation with a distinctive temporal quality in the sense that it encapsulates the situation whereby a series of acts attributable to the state over a period of time culminate in the expropriatory taking of such property. […] A plea of creeping expropriation must proceed on the basis that the investment existed at a particular point in time and that subsequent acts attributable to the state have eroded the investor’s rights to its investment to an extent that it is violative of the relevant international standard of protection against expropriation.
Creeping expropriation takes place within a wide variety of circumstances. It cannot be identified through a single principle. However, it is true that general factors which can be isolated are that there is a deprivation in the value of the interest of the foreign investor in the assets and that the time period over which this occurs is often longer than necessary for a single act. But, these are not factors that contribute to the formulation of a single rule that describes the process. Thus, where the management of company is taken over, the company’s assets and its shareholdings are not affected but the foreign investor’s control over the operations of the company is diminished. With the increase of administrative control over foreign investment, there has been an increase in the use of such techniques of interference with the right of the foreign investor.
Another remarkable point in relation to creeping expropriation is that, if one or two events in series which can readily be identified as expropriation as those that destroy the investment’s value, then it is not creeping expropriation since some of events need not to be expropriatory in themselves. The explanation is found in Waste Management:
A ‘creeping expropriation’ is comprised of a number of elements, none of which can separately constitute the international wrong, i.e. the creeping expropriation. These constituent elements [may] include non-payment, non-reimbursement, cancellation, denial of judicial access, actual practice to exclude, non-conforming treatment, in consistent legal blocks, and so forth. The ‘measure’ at issue is the creeping expropriation itself; it is not merely a subcomponent part of expropriation.
3.3.2 Measure ‘tantamount to’ or ‘equivalent to’ expropriation
Expression ‘tantamount to’ or ‘equivalent to’ expropriation can be found in a number of multilateral investment treaties as well as in bilateral investment treaties.
According to Waste Management v Mexico, the tribunal stated that:
An indirect expropriation is still a taking of property. By contrast, where a measure tantamount to an expropriation is alleged, there may have been no actual transfer taking or loss of property by any person or entity, but rather an effect on property which formal distinctions of ownership irrelevant…Evidently the phase ‘taking a measure tantamount to nationalization or expropriation of such an investment’ in Article 1110(1) was intend to add to the meaning of the prohibition, over and above the reference to indirect expropriation. Indeed there is some indication that it was intended to have broad meaning, otherwise it is difficult to see why Article 1110(8) was necessary.
In Pope & Talbot v Canada, the investor argued that the phase ‘tantamount to expropriation appearing in Article 110(1) of NAFTA went beyond the meaning of expropriation ordinarily accepted in customary international law. However, this argument was rejected by the arbitral tribunal, which fused the two expressions ‘tantamount to’ and ‘equivalent to’ in order to limit their scope:
the tribunal does not believe that the phase ‘measure tantamount to nationalization or expropriation’ in Article 1100(1) broadens the ordinary concept of expropriation under international law to require compensation for measure effecting property interests without regard to the magnitude or severity of that essect. […] ‘Tantamount’ means nothing more than equivalent. Something that is equivalent to something else cannot logically encompass more.
This conclusion was approved in a later case in relation to Article 1110 of NAFTA, which covers not only measures of expropriation but also measures ‘tantamount’ to expropriation, ‘tantamount’ has been held as meaning ‘equivalent’ to:
The primary meaning of the word ‘tantamount’ given by the Oxford English Dictionary is ‘equivalent’. Both words require a tribunal to look at the substance of what has occurred and not only a form. A tribunal […] must look at the real interests involved and the purpose and effect of the government measure […] The tribunal agrees with the conclusion in the Interim Award of the Pope & Talbot arbitral tribunal that something that is ‘equivalent’ to something else cannot logically encompass more. In common with the Pope & Talbot tribunal, this tribunal considers that the drafters of the NAFTA intended the word ‘tantamount’ to embrace the concept of so-called ‘creeping expropriation’, rather than to expan the internationally accepted scope of the term expropriation.
Thus, forms of indirect expropriation are numerous and cannot readily be differentiated. Some tribunals do not even seek to differentiate such terms, noting that their scope should be regarded as ‘functionally equivalent’
3.3.3 Regulatory taking
‘Regulatory taking’ is defined by UNCTAD as a property that fall within the police powers of a state, or otherwise arises from state measures like those pertaining to the regulation of the environment, health, morals, culture of economy of host state’.
International law has to identify in a comprehensive and definitive fashion what regulations are ‘commonly accepted’ as with in the power of states and non-compensable. In other words, international law has to draw a bright and easily distinguishable line between regulation and expropriation, especially indirect expropriation.
Case-by-case basis/ FILLING IN THE GAP: METHODS AND SOURCES
Despite a number of legal instruments identifying indirect methods of takings, state measures that can potentially impact upon an investor’s right in its investment are still in confusion since there are no specific rules as to which acts do or do not constitute expropriation. The jurisprudence is inconsistent and the outcome of disputes is often unpredictable. A more practical solution, despite the generality and the breadth of the reference of expropriation discussed above, in practice arbitral tribunals have placed particular reliance on the judicial interpretations of the term in other arbitral awards and judicial decisions, a so called case by case basis which is one of the legal foundations of the international taking doctrine. It demonstrates the range of scenarios in which the question of indirect expropriation may come up.
The tribunals have distinguished legitimate non-compensable regulations from indirect expropriation requiring compensation, a careful examination reveals that they have identified the following criteria determining whether an indirect expropriation has occurred.