Under International Arbitration law, expropriation is not illegal in and of itself. Expropriation will be declared legal under most IIAs if it meets all of the following criteria:
- In the public interest or for a public purpose.
- In an equitable and nondiscriminatory manner.
- In compliance with the law.
Against the early, appropriate, and effective payment of compensation.
States are not obligated to pay compensation when they enact non-discriminatory, bona fide restrictions that are intended at universal prosperity, such as public health or safety, in the usual exercise of their regulatory function, according to the theory of police powers.
Compensation for expropriation does not have a universally accepted criterion. BITs usually include specific compensation requirements, based on a formula that mandates ‘prompt, adequate, and effective’ payment (the Hull formula).
The International Law Commission’s Draft (“ILC’s Draft”) Articles on State’s responsibility for Internationally Wrongful Acts offers some guidance on the level of compensation in international wrongful acts cases. The State accountable for an internationally wrongful act is under a responsibility to compensate for the damage caused by such act, inasmuch as such impairment is not made noble by restitution, according to Article 36(1) of the ILC’s Draft. The ILC’s Draft offers a “fair market value” basis for expropriation compensation in Comment No. 22 to Article 36:
‘The ‘fair market value’ of the property taken is used to calculate compensation for property seized or destroyed as a result of an international unlawful act’.
In the Chorzow Factory case it was discussed that the customary international law rules concerning ‘the implications of a lawful or unlawful expropriation. In the case of a legitimate expropriation, the investor is only authorized to compensation for the losses experienced at the time of the expropriation (damnum emergens). In the event of a wrongful expropriation, the investor is eligible to full compensation, which includes not just losses but also profits (lucrum cessans)’.
- Restitution can be equivalent to or superior to compensation, but it can certainly not be less. When the loss surpasses the worth of the expropriated investment, reparation would be desirable to compensation.
- Although the investment’s cost remains unchanged irrespective of whether the expropriation was legal or illegal, reparation may comprise factors other than the investment’s value in order to re-establish the circumstance that would have been had the illicit act not occurred.
The use of restitution as a measure of redress is uncommon. Many tribunals have accepted their jurisdiction to mandate reparation, but they have also recognized the practical and legal impossibilities that may occur.
Expropriation in succinct refers to the state seizing property belonging to a non-native investor, which, if done illegally, exposes the state to international liability. Expropriation is not an illegal act in and of itself. It is widely accepted that a State has the right to expropriate foreign-owned property when there has been a breach of agreement and that the expropriation must be for a public purpose, carried out in accordance with due process, be non-discriminatory, and be accompanied by (prompt and adequate) compensation which is not expressly provided by International Centre for Settlement of Investment Disputes (“ICSID”) or other relevant legislation. Because the notion is rarely specified in IIAs and is thought to derive from customary international law, tribunals tend to interpret it according to international law principles. Most investment treaties include protections against indirect expropriation, equivalent measures, or measures with the same effect, or arbitral tribunals construe them to include such protection. Expropriation claims are only mature after the taking has occurred and has been approved by several previous tribunals. Expropriation can be defined as the improper termination of a contract or a breach of the contract. The State responsible for an internationally wrongful act is under a responsibility to compensate for the damage caused by such act.
The writer is an associate and lawyer at HSU advocates and expert in legal research and ADR.
