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«ISBN 92-64-01164-1 International Investment Law: A Changing Landscape A Companion Volume to International Investment Perspectives © OECD 2005 ...»

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6. the NAFTA Tribunals addressed claims concerning market access and market share and sugg ested that these might be property rights for purposes of expropriation. In neither case, however, did the tribunal find that market access or market share could be capable themselves of being expropriated, nor did either tribunal find that an expropriation took place. See Pope & Talbot, Inc v. Canada, I nte r im Award (26 Ju ne 20 0 0), par. 9 6 -98 an d S.D. Myers, Inc. v. Ca na da, (13 November 2000) Partial Award, 232. International Legal Materials 408, par. 232.

See also e.g. G. White “Nationalisation of Foreign Property” 49 (1961); The Iran-United States Claims Tribunal: Its contribution to the Law of State Responsibility 196-97 No. 33 (Richard Lillich and Daniel Magraw editors, 1998).

7. On this point, Dolzer notes that, “‘creeping expropriation' suggests a deliberate strategy on the part of the state, which may imply a negative moral judgement”.

See Dolzer, "Indirect Expropriation of Alien Property", ICSID Review, Foreign Investment Law Journal, (1986) pp. 41-59 at 44.

8. Ian Brownlie, “Public International Law”, Oxford University Press, 6th Edition, 2003 at 509.

9. M. Sornarajah, “The International Law on Foreign Investment” (1994) at 283, Cambridge University Press.

10. It is an accepted principle of customary international law that where economic injury results from a bona fide non-discriminatory regulation within the police powers of the State, compensation is not required. A state measure will be discriminatory if it results “in an actual injury to the alien […] with the intention to harm the aggrieved alien” to favour national companies. See Dolzer and Stevens, op. cit. No. 5. The Restatement Third recognises the non-discrimination rule: “One test suggested for determining whether regulation and taxation program are intended to achieve expropriation is whether they are applied only to alien enterprises” “Restatement of the Law Third, the Foreign Relations of the United States”, American Law Institute, Vol. 1, 1987, Section 12. The Iran-US Claims Tribunal recognised in the Amoco case that Iran owed compensation for expropriatory measures, and also acknowledged the rule of non-discrimination.

The Award specifically states that: “discrimination is widely prohibited by customary international law in the field of expropriation”, although the Tribunal found no discrimination in this case. Amoco, see op. cit., No. 6.

INTERNATIONAL INVESTMENT LAW: A CHANGING LANDSCAPE – ISBN 92-64-01164-1 – © OECD 2005

“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

As mentioned above, there is no generally accepted and clear definition of the concept of indirect expropriation and what distinguishes it from non-compensable regulation, although this question is of great significance to

both investors and governments. As Dolzer and Stevens wrote:

“To the investor, the line of demarcation between measures for which no compensation is due and actions qualifying as indirect expropriations (that require compensation) may well make the difference between the burden to operate (or abandon) a non-profitable enterprise and the right to receive full compensation (either from the host State or from an insurance contract). For the host State, the definition determines the scope of the State’s power to enact legislation that regulates the rights and obligations of owners in instances where compensation may fall due. It may be argued that the State is prevented from taking any such measures where these cannot be covered by public financial resources.”11 As Higgins wrote in her study on the taking of property by the state, the issue can be further refined as the determination of who is to pay the economic cost of attending to the public interest involved in the measure in question. Is it to be the society as a whole, represented by the state, or the owner of the affected property?12 Nouvel has pointed out that in the case of nationalisation or direct expropriation, the dispossession to the detriment of a private person coincides with the appropriation to the profit of a public person; the measures tantamount to expropriation do not have this linkage. In the latter case, the reduction of the value of private property is not necessarily accompanied by an increase in public wealth.13

2. Legal instruments and other texts Protection against indirect expropriation has been included in various forms of international instruments. Literally all relevant treaties and draft treaties provide for indirect expropriation or measures tantamount to expropriation. However, most of them stay mute on the treatment of the non-compensable regulatory measures, with the exception of: the European Convention on Human Rights and Fundamental Freedoms (hereafter the European Convention on Human Rights), the recently concluded US-Free

11. Dolzer and Stevens, op. cit., No. 5 at 99.

12. R. Higgins “The Taking of Property by the State: Recent Developments in International Law” Recueil des cours – académie de Droit international, 1982, Vol. 176 at 276-77.

13. Yves Nouvel, “Les mesures équivalant à une expropriation dans la pratique récente des tribunaux arbitraux”, Revue Générale du Droit International Public, 2002-1, pp. 80-102 at 89.





48 INTERNATIONAL INVESTMENT LAW: A CHANGING LANDSCAPE – ISBN 92-64-01164-1 – © OECD 2005

“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

Trade Agreements and the new model US and Canada BITs. The OECD Draft Convention on the Protection of Foreign Property and the draft OECD Multilateral Agreement on Investment, while themselves silent on the non-compensable regulatory measures, were accompanied by commentaries which did address the issue. Other texts which addressed it are the Harvard Draft Convention on International Responsibility, and the Third Restatement of Foreign Relations of the United States which, while the work of scholars, not state practice, constitute an influential element of doctrine.

2.1. Legal texts which include indirect expropriation without addressing non-compensable regulation Bilateral Investment Treaties contain brief and general indirect expropriation provisions which focus on the effect of the government action and do not address the distinction between compensable and non-compensable regulatory actions.

For example, treaties entered by France refer to “measures of expropriation or nationalisation or any other measures the effect of which would be direct or indirect dispossession”. The UK treaties provide that expropriation also covers measures “having effect equivalent to nationalisation or expropriation”. Other treaties, such as some of those concluded by Sweden, refer to “any direct or indirect measure” or “any other measure having the same nature or the same effect against investments”. The former United States Model BIT mentions “measures tantamount to expropriation or nationalisation”. Several United States treaties are more specific on these measures: “any other measure or series of measures, direct or indirect, tantamount to expropriation (including the levying of taxation, the compulsory sale of all or part of an investment, or the impairment or deprivation of its management, control of economic value…”14 The 1992 World Bank Guidelines section IV(1) on “Expropriation and Unilateral Alterations or Termination of Contracts”, state that : “A state may not expropriate or otherwise take in whole or in part a foreign private investment in its territory, or take measures which have similar effects, except where this is done in accordance with applicable legal procedures, in pursuance in good faith of a public purpose, without discrimination on the basis of nationality and against the payment of appropriate compensation.”

T he 19 9 4 En ergy C harter Treaty in its Ar ti cle 13 provid es th at:

“investments of 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” e xc ept wh ere such me as ure complies w ith the rule s of customary i n te r n a t i o n a l l a w i n t h i s m a t t e r ( p u b l i c p u r p o s e, d u e p r o c e s s, non-discrimination and compensation).

–  –  –

INTERNATIONAL INVESTMENT LAW: A CHANGING LANDSCAPE – ISBN 92-64-01164-1 – © OECD 2005

“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

Article 1110 of NAFTA protects against the expropriation of foreign

investments with the following language:

1. No Party may directly or indirectly nationalise or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to

nationalisation or expropriation of such an investment, except:

a) for a public purpose;

b) on a non-discriminatory basis;

c) in accordance with due process of law and Article 1105(1);15 and

d) on payment of compensation in accordance with [subsequent paragraphs specifying valuation of expropriations and form and procedure of payment].

2.2. Legal texts which address non-compensable regulation The relevant principles for the purposes of the European Convention of Human Rights are included in Article 1 of Protocol 1, concluded in 1952 and entered into force in 1954. Though this article, does not say so explicitly, it strongly implies that the duty to compensate is not applicable to normal regulation:16 “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 preceding 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” [italics added].

In 1961, the Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, drafted by Sohn and Baxter, assumed a taking to occur in the case of any “unreasonable interference with the 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 within a reasonable period of time after the inception of such interference”. In its Article 10(5) it

recognised the existence of a category of non-compensable takings:

“An uncompensated taking of an alien property or a deprivation of the use or enjoyment of property of an alien which results from the execution

15. Article 1105(1) provides: “each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.”

16. The jurisprudence attached to the Convention by the European Court of Human Rights has consistently taken this line.

50 INTERNATIONAL INVESTMENT LAW: A CHANGING LANDSCAPE – ISBN 92-64-01164-1 – © OECD 2005

“INDIRECT EXPROPRIATION” AND THE “RIGHT TO REGULATE” IN INTERNATIONAL INVESTMENT LAW

of tax laws; from a general change in the value of currency; from the action of the competent authorities of the State in the maintenance of public order, health or morality; or from the valid exercise of belligerent rights or otherwise incidental to the normal operation of the laws of the State shall not be considered wrongful.” Article 3 of the 1967 OECD 17 Draft Convention on the Protection of Foreign Property,18 states that “no Party shall take any measures depriving, directly or indirectly, of his property a national of another Party…” unless four conditions are met according to recognised rules of international law.19 An accompanying note on the nature of obligation and its scope states the duty to compensate

in a broad way:

“Article 3 acknowledges, by implication, the sovereign right of a State, under international law, to deprive owners, including aliens, of property which is within its territory in the pursuit of its political, social or economic ends. To deny such a right would be attempt to interfere with its powers to regulate – by virtue of its independence and autonomy, equally recognised by international law – its political and social existence. The right is reconciled with the obligation of the State to respect and protect the property of aliens by the existing requirements for i ts e xe rc is e – be fo re al l, th e req uire me n t t o p ay t h e alie n compensation if his property is taken.” However, subsequent notes make clear that the concept of “taking” is not intended to apply to normal and lawful regulatory measures short of direct taking of property rights, but rather, to misuse of otherwise lawful regulation to

deprive an owner of the substance of his rights:

4(a) “… By using the phrase ‘to deprive […] directly or indirectly […]’ in the text of the Article it is, however, intended to bring within its compass any measures taken with the intent of wrongfully depriving the national concerned of the substance of his rights and resulting in such loss (e.g. prohibiting the national to sell his property of forcing him to do so at a fraction of the fair market price)” (emphasis in original).

17. The OECD Code of Liberalisation of Capital Movements, through its provisions on the free disposal of blocked accounts and other non-resident owned assets, includes a dimension of preventing confiscation measures, in addition to the liberalisation disciplines per se of the Code. However, the Code is silent on the issue of the “right to regulate” in the context of this note.

18. OECD Draft Convention on Foreign Property, 12 October 1967, pp. 23-25.

19. The measures in question must be taken: i) in the public interest; ii) under due process of law; iii) not be discriminatory; and furthermore, iv) just and effective compensation must be paid.



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