Expropriation is the ‘occupying or taking of property belonging to a non-native investor by the government, if done illegally, exposes the government to international liability’. In investment arbitration, expropriation refers to two concepts:
- Each State’s right to implement sovereignty over its territory;
- Each State’s obligation to respect foreigners’ property.
The first indicates that a state or government may expropriate a non-native investor’s property in exceptional circumstances. The second indicates that expropriating foreign-owned property will only be legal if the State’s action fits specified criteria. ‘Nationalization’ is a type of expropriation that typically encompasses a whole industry or geographic region and appears in the aftermath of a large political, economic or social transformation.
In Saint-Gobain v. Venezuela, the court found that the term “expropriation” is clearly defined by a variety of factors, including:
- A State’s conduct
- Regarding a person’s property
- Consisting of a de jure or de facto taking of the property
- For the State’s or a third party’s advantage
In Olgun v. Paraguay, it was held that ‘for an expropriation to happen, there must be events that can be contemplated reasonably suitable for producing the effect of denying the affected party of the property it owns, in such a manner that whoever executes those actions will obtain control, or at least the fruits of the expropriated property, directly or indirectly’. Expropriation, therefore, necessitates a teleological motivated action and omissions, no matter how heinous, are insufficient for it to occur.
Expropriation in and of itself is not an unlawful act, which was held in arbitral decision of a case titled as Siag v. Egypt. Expropriation of foreign-owned property by a state is widely acceptable. Expropriation, on the other hand, is licit only if certain conditions are met, those set forth in the relevant bilateral investment treaty (“BIT”).
For a legitimate expropriation, BITs normally impose the following conditions:
- It is necessity to be for a public purpose
- It must be done in line with due process
- It must not be discriminatory
- It must be followed by (rapid and adequate) compensation.
In Glamis Gold v. United States, the Court stated that a finding of expropriation commands that a governmental act has breached Chapter 11’s responsibility and that the break has resulted in loss. Article 1117(1) of North American Free Trade Agreement (“NAFTA”) Article establishes parameters for a State Party’s investor to file a claim for harm caused to its subsidiary in another State Party’s territory as a result of the investment.
Expropriation is encompassed in almost every International Investment Agreement (“IIA”), but under different names, such as ‘deprivation’. Because the notion is rarely specified in IIAs and is thought to derive from customary international law, tribunals supervise to interpret it according to international law principles.
It was established in the Canada-Czech Republic Bilateral Investment Treaty (BIT) (2009) that ‘investments of investors of either Contracting Party must not be nationalized, expropriated, or subjected to events having an effect comparable to nationalization or expropriation in the territory of the other Contracting Party, excluding for a public purpose, under due process of law, in a non-discriminatory manner, and provided that such compensation will be depending on a number of factors’.
Some investment treaties, such as the Brazil-India BIT (2020), include a specific reference to arbitral court’s prerogative to assess the amount of compensation.
In Quasar de Valores and others v. Russia, the Court of Appeal determines that an arbitral tribunal’s jurisdiction under Article 10 of the Treaty does not extend to a review of whether or not expropriation occurred. The Court of Appeal believes that this interpretation eliminates any lingering ambiguity or uncertainty about the meaning of the article and does not result in plainly unreasonable or absurd results.
In EURAM Bank v. Slovakia, the Tribunal was told that the two other issues must be addressed before it can reach a definitive decision on this issue. First, the Claimant claims that the BIT’s object and purpose justify a broader interpretation. It claims that the BIT’s goal is to protect investors, and that this goal supports a more expansive interpretation of Article 8 in order to make the right of resort to arbitration, which it sees as a vital aspect of that protection, more effective.
In Pawlowski v. Czech Republic, the court found that direct expropriation entails either a mandatory formal transfer of the property’s title or its actual physical seizure. Direct expropriations are becoming increasingly rare. In Infinito Gold v. Costa Rica, it was discussed that indirect expropriation happens when property is otherwise wrecked or the owner is underprivileged of his or her ability to manage, utilize, or control the property in a momentous way (alias “dispossession”), but the legal title is not impacted.
As explained in Telenor v. Hungary, there are several types of indirect expropriation, the most notable of which is creeping expropriation, which happens progressively or in phases through measures that do not essentially reach to the level of a taking. A de facto expropriation, on the other hand, comes suddenly as a result of a single action.
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. As a result, in Pawlowski v. Czech Republic, it was established that the tribunals have concluded that the kinds of events that can lead to expropriation are fairly broad.
Regulatory actions can also have indirect expropriation-like impacts. In accordance with the police powers doctrine, many IIAs have incorporated certain language to differentiate between expropriatory and regulatory measures, such as the Colombia-India BIT (2009) and the Canada-Slovak Republic BIT (2010).
NAFTA does not establish a meaning for the phrase “expropriation”, according to Fireman’s Fund v. Mexico. The definitions appear to vary in eleven situations where Article 1110(1) of the NAFTA was considered to date. Taking previous cases into account, as well as customary international law in general, the current Tribunal maintains that expropriation involves a government-type power taking (which may include destruction) of an investment by a NAFTA- covered investor.
An act jurii imperii must have been occupied by the entertainer state. It was found in Caratube v. Kazakhstan (II) that a simple contractual breach is insufficient to establish expropriation. According to the Award, a ‘sovereign act’ is required for a contractual breach to be considered an expropriation, which involves interference in the contract by a state acting in the exercise of its sovereign rights (rather than the state acting in the capacity of a contracting party).
In CME v. Czech Republic, it was held that some tribunals have determined that property dispossession can be initiated by actions or sloths, while others have held that the host State’s omissions are insufficient. In AWG v. Argentina, it was established that when a claim is submitted, expropriation must have occurred; otherwise, the claim may be regarded premature, and the tribunal’s jurisdiction may be questioned.
Expropriation claims are only mature after the taking has happened and has been approved by several previous tribunals. In Glamis Gold v. USA while determining whether the Tribunal has subject matter jurisdiction to resolve the Article 1110 accusations before it, the Tribunal commences from the premise that a finding of expropriation necessitates that a governmental act has breached a compulsion under Chapter 11 and such breach has stemmed in a finding of expropriation, the Tribunal wrote.
In Corn Products v. Mexico, the court stated that the tribunals must first ascertain if an expropriation has occurred before deciding whether or not it was legal.
There are objectives behind the expropriation as to the property right as in Philip Morris v. Uruguay, the claimant must be the owner of a protected investment. Expropriation of acquired rights is also a possibility, this issue may be covered by municipal law. Furthermore, tribunals have frequently viewed the investment “as a whole” when determining whether an expropriation has occurred. Expropriation is limited to property rights (can be alienated or assigned) rather than personal rights. Arbitral tribunals have acknowledged the expropriation of both tangible and immaterial rights (trademarks, entree to the U.S. marketplace under NAFTA).
Contractual rights have been included in the scope of expropriatory objects by tribunals. Expropriation can be defined as the improper termination of a contract or a breach of the contract. In certain cases, tribunals have typically demanded that three prerequisites be completed in order to proceed:
- To cure the breach of contract, the investor shall first prosecute the State counter- party in the appropriate jurisdiction.
- It is frequently necessary to make an initial determination of the presence of a contractual infringement under domestic law.
- The breach must result in a ‘significant reduction in the worth of the investment’.
- At least one court has ruled that ‘wholesome contractual rights’ cannot be removed or expropriated.
- At least one court has determined that the right to formal discussions cannot be taken away.
Continued…
The writer is an associate and lawyer at HSU advocates and expert in legal research and ADR.
