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

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

4(b) “… Thus in particular, Article 3 is meant to cover ‘creeping nationalisation’ recently practiced by certain states. Under it, measures

otherwise lawful are applied in such a way:

[…] as to deprive ultimately the alien of the enjoyment of value of his property, without any specific act being identifiable as outright 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 commentary to the American Law Institute’s Restatement Third of Foreign Relations Law of the United States, 20 was designed to assist in determining, inter alia, how to distinguish between an indirect expropriation

and valid government regulation:

“A state is responsible as for an expropriation of property when it subjects alien property to taxation, regulation, or other action that is confiscatory, or that prevents, unreasonably interferes with, or unduly delays, effective enjoyment of an alien’s property or its removal from the state’s territory… A state is not responsible for loss of property or for other economic disadvantage resulting from 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…” [italics added].

The MAI Negotiating Text was almost identical to the NAFTA provision.

However, the MAI Commentary noted that by extending protection to “measures having equivalent effect” to expropriation, the text was intended to cover “creeping expropriation”. MAI negotiators addressed the distinction between indirect expropriation and general regulations in the Report by the Chairman of the Negotiating Group (Chairman’s Report)21 which was put forward at the later stage of the negotiations. In its Annex 3, Article 3 (Right to Regulate) and an interpretative note to Article 5 (Expropriation and

Compensation)22 it is stated:

Article 3 “Right to Regulate” “[a] 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 health, safety or environmental concerns provided that such measures are consistent with this agreement.” 20. “Restatement of the Law Third, the Foreign Relations Law of the United States,” American Law Institute, Vol. 1, 1987, Section 712, Comment g.

21. The Multilateral Agreement on Investment (Report by the Chairman of the Negotiating Group) DAFFE/MAI(98)17, 4 May 1998, available at www1.oecd.org/daf/ mai/pdf/ng/ng9817e.pdf.

22. Idem, pp. 13-15.

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

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

–  –  –

3. Criteria determining whether an indirect expropriation has occurred As discussed above, few legal texts attempted to address directly how to distinguish legitimate non-compensable regulations having an effect on the economic value of foreign investments and indirect expropriation, requiring compensation. Scholars recognised the existence of the distinction but did not shed much light on the criteria for making the distinction. This may reflect reluctance to attempt to lay down simple, clear rules in a matter that is subject to so many varying and complex factual patterns and a preference to leave the resolution of the problem to the development of arbitral decisions on a

23. See OECD document C/MIN(98)16/FINAL.

24. For a discussion on regulatory expropriations in the MAI, see the article by R.

Geiger “Regulatory Expropriations in International Law: Lessons from the Multilateral Agreement on Investment”, N.Y.U. Environmental Law Journal, 2002, Vol. 11, No.1, pp. 94-109 at 104.

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

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

case-by-case basis.25 The two most prominent sources of such decisions were the Iran-United States Claims Tribunal26 and decisions arising under Article 1, Protocol 1 of the European Convention for the Protection of Human Rights.

The recent period has seen a further body of jurisprudence, from cases based on NAFTA and bilateral investment agreements. At the same time, a new generation of investment agreements, including investment chapters of Free Trade Agreements has developed, which include criteria to articulate the difference between indirect expropriation and non-compensable regulation.

3.1. Jurisprudence Although there are some “inconsistencies”27 in the way some arbitral tribunals have distinguished legitimate non-compensable regulations having an effect on the economic value of foreign investments and indirect expropriation requiring compensation, a careful examination reveals that, in broad terms, they have identified the following criteria which look very similar to the ones laid out by the recent agreements: i) the degree of interference with the property right, ii) the character of governmental measures, i.e. the purpose an d the context of th e gove rn me ntal measure, and iii) the interference of the measure with reasonable and investment-backed expectations.





25. Christie wrote in 1962 that “it is evident that the question of what kind of interference short of outright expropriation constitutes a ‘taking’ under international law presents a situation where the common law method of case by case development is pre-eminently the best method, in fact probably the only method, of legal development”. G. Christie, “What Constitutes a Taking of Property under International Law?”, British Yearbook of International Law, 1962, pp. 307-338. Sornarajah noted that the difficulty is “in the formulation of a theory that could be used as a predictive device so that there could be guidance as to whether the taking is a compensable or not. Here, though several efforts have been made at devising a theory capable of making the distinction, none has been successful”. See op. cit., No. 9. Dolzer acknowledged after an extensive review of judicial precedent and state practice that “one cannot but admit at this stage that the law of indirect expropriation can be established, at this moment, on the basis of primary sources of international law, only in a very sketchy and rough manner”. See op. cit., No. 7.

26. The Iran-United States Claims Tribunal was established in 1981 in order to adjudicate claims by nationals of each country following the Iranian revolution.

Its creation was pursuant to the Algiers Declarations which resolved the hostage crisis between Iran and the United States.

27. There is a view that the “inconsistent” case law which has been developed may simply reflect the different approaches of different treaties. According to this view, for example, the practice of the European Court of Human Rights on what “indirect expropriation” means could well be expected to differ from that of NAFTA tribunals, given the different wording, overall purpose and history of the treaties they have to refer to (European Convention of Human Rights on the one hand, and NAFTA on the other hand).

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

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

3.1.1. Degree of interference with the property right Severe economic impact. Most international decisions treat the severity of the economic impact caused by a government action as an important element in determining whether it rises to the level of an expropriation requiring compensation. International tribunals have often refused to require compensation when the governmental action did not remove essentially all or most of the property’s economic value. There is broad support for the proposition that the interference has to be substantial in order to constitute expropriation, i.e. when it deprives the foreign investor of fundamental rights of owners hip, or w hen it interferes with the investment for a significant period of time. Several international tribunals have found that a regulation may constitute expropriation whe n it substantially impairs the investor’s economic rights, i.e. ownership, use, enjoyment or management of the business, by rendering them useless.

Without such substantial impairment, mere restrictions on the property rights do not constitute takings. The European Court of Human Rights (ECHR)28 has found an expropriation where the investor has been definitely and fully deprived of the ownership of his/her property. If the investor’s rights have not disappeared, but have only been substantially reduced, and the situation is not “irreversible”, there will be no “deprivation” under Article 1, Protocol 1 of the European Convention of Human Rights.29

28. The European Court of Human Rights is the Court established by the Council of Europe under the Protection of Human Rights and Fundamental Freedoms Convention, to determine questions brought before it by individual petitioners or signatory states concerning violations of human rights by signatory states. It does not distinguish between foreign and domestic owners, but its distinctions as to compensable and non-compensable takings on a human rights basis is relevant.

29. See cases: 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). See for discussion H. Ruiz Fabri, “The Approach Taken by the European Court of Human Rights to the Assessment of Compensation for “Regulatory Expropriations of the Property of Foreig n Investors”, N.Y.U. Environmenta l Law Journal, Vol. 11, No. 1, 20 02, pp. 148-173.

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

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

The first case under the Iran-United States Claims Tribunal30, 31 was Starrett Housing, which dealt with the appointment of Iranian managers to an American housing project. The Tribunal concluded that an expropriation

had taken place:

“[It] is recognised by international law that measures taken by a State can interfere with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated, even thought the State does not purport to have expropriated them and the legal title to the property formally remains with the original owner.” In the Sea-Land33 case one of the issues was alleged expropriation of a bank account. The Tribunal did not find any substantial deprivation of or interference with the claimant’s rights to his account and rejected the claim by noting that the “account remains in existence and available in rials, at Sea-Land’s disposal”.

In the Tippetts 34 case, the Tribunal found an indirect expropriation because of the actions of a government-appointed manager, rather than because of his appointment per se,35 and equated that deprivation of property

rights with a taking of property.36 The Tribunal said:

“While assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government, thus requiring compensation under

30. Sornarajah suggests that “although the awards of the Iran-United States Claims Tribunal have been a fruitful recent source for the identification of indirect takings, they dealt with takings that took place in the context of a revolutionary upheaval and the propositions the tribunal formulated may not have relevance outside the context of the events that attended the Iranian upheaval following the overthrow of the Shah of Iran”. See op. cit. No. 9 at 282. For instance, these actions and the context in which they occurred are, in many ways, different from the sorts of environmental and land-use regulations that have been the subjects of NAFTA claims.

31. For details on these cases see Seddigh and G. H. Aldrich, “What Constitutes a Compensable Taking of Property? The Decisions of the Iran-United States Claim Tribunal”, The American Journal of International Law, Vol. 88, pp. 585-609.

32. Starret Housing Corp. v. Iran, 4 Iran-United States Cl. Trib. Rep. 122, 154 (1983).

33. Sea-Land Service Inc. v. Iran, 6 Cl. Trib. Rep.149 (1984). See Seddigh and Aldrich p. 656, op. cit., No. 31.

34. Tippetts v. TAMS-AFFA Consulting Engineers of Iran, 6 Cl. Trib. 219 (1984).

35. While Tippetts was able to work with the Iranian appointed manager for some months and re-established its rights as a partner, its personnel left Iran following t he se izu re of t he A me ric an E mbassy a nd t he new man ag e r broke off communications with Tippetts by refusing to respond to its letters and telexes.

36. In this case, the Tribunal said that it “prefers the term “deprivation’ to the term “taking”, although they are largely synonymous, because the latter may be understood to imply that the government has acquired something of value, which is not required”.

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

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



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