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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 law, such a conclusion is warranted whenever events demonstrate that the owner was deprived of fundamental rights of ownership and it appears that the deprivation is not merely ephemeral…” In the NAFTA context, in the Pope & Talbot v. Canada case,37 the Tribunal found that although the introduction of export quotas resulted in a reduction of profits for the Pope & Talbot company, sales abroad were not entirely prevented and the investor was still able to make profits. It stated: “… mere interference is not expropriation; rather, a significant degree of deprivation of fundamental rights of ownership is required.”38 In S.D. Myers v. Canada,39 a United States company, which operated a PCB remediation facility in the United States, alleged that Canada violated NAFTA Chapter 11 by banning the export of PCB waste to the United States. The Tribunal also distinguished regulation from expropriation primarily on the basis of the degree of interference with property rights: “expropriations tend to involve the deprivation of ownership rights; regulations [are] a lesser interference”.40 In Marvin Roy Feldman Karpa (CEMSA) v. United Mexican States,41 CEMSA, a registered foreign trading company and exporter of cigarettes from Mexico, was allegedly denied the benefits of the law that allowed certain tax refunds to exporters and claimed expropriation under NAFTA Article 1110. The Tribunal found that there was no expropriation since “the regulatory action has not deprived the Claimant of control of his company, interfered directly in the internal operations of the company or displaced the Claimant as the controlling shareholder. The Claimant is free to pursue other continuing lines of business activity… Of course, he was effectively precluded from exporting cigarettes… However, this does not amount to Claimant’s deprivation of control of his company”.

In GAMI v. The United Mexican States,42 the case concerned the impact of Mexico’s expropriation of several sugar mills on GAMI, a minority shareholder

37. Pope & Talbot Inc. v. Canada, see op. cit., No. 6.

38. In addition, the Tribunal stated that: “Regulations can indeed be characterised in a way that would constitute creeping expropriation… Indeed, much creeping expropriation could be conducted by regulation, and a blanket exception for regulatory measures would create a gaping loophole in international protection against expropriation”, see Award, par. 99.

39. S.D. Myers Inc. v. Government of Canada, see op. cit., No. 6.

40. The Tribunal added that: “the distinction between expropriation and regulation screens out most potential cases of complaints concerning economic intervention by a state and reduces the risk that governments will be subject to claims as they go about their business of managing public affairs.”

41. In this case, Marvin Feldman, a United States citizen, submitted claims on behalf of CEMSA. ICSID Case No. ARB(AF)/99/1, Award of 16 December 2002, pp. 39-67 at 59.

42. Gami v. The Government of the United Mexican States, Award, 15 November 2004.

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

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

in some of those mills. GAMI proceeded on the basis that “Mexico’s conduct impaired the value of its shareholding to such an extent that it must be

considered tantamount to expropriation”.43 The Tribunal found that:

“With knowledge of the magnitude of diminution one might be in a position to consider whether a line is to be drawn beyond which the loss is so great as to constitute a taking. But GAMI has staked its case on the proposition that the wrong done to it did in fact destroy the whole value of its investment. GAMI seeks to lend credibility to its posture by agreeing to relinquish its shares in GAM as a condition of the award it seeks. It suggests that any residual value is therefore of no moment. This posture is untenable. The Tribunal cannot be indifferent to the true effect in the real value of the investment of the allegedly wrongful act. GAMI has not proved that its investment was expropriated for the purposes of Article 1110.”44 The European Court of Human Rights, in the most widely cited case under Article 1, Protocol 1 of the European Convention of Human Rights (see above), Sporrong and Lönnroth v. Sweden 45 (1982), did not find indirect expropriation to have occurred as a result of land use regulations that affected

the claimant’s property because:

“… although the right [of peaceful enjoyment of possessions] lost some of its substance, it did not disappear […] The Court observes in this conne ction th at the [claimants ] could con tinue to utilise their possessions and that, although it became more difficult to sell properties [as a result of the regulations], the possibility of selling subsisted.” Another relevant decision is the Revere Copper46 case (1980). The case arose from a concession agreement – which was to last for twenty five years – made by a subsidiary of the Revere Copper company with the government of Jamaica. The government, despite a stabilisation clause in the agreement ensuring that taxes and other financial liabilities would remain as agreed for the duration of the concession, increased the royalties. The company found it





43. Idem, par. 35.

44. Idem, par. 133.

45. In this case, long-term expropriation permits (23 and 8 years) had been granted by the city of Stockholm in respect of the applicant’s properties. These did not of themselves expropriate the property, but gave local authorities the power to do so, should they so decide in the future. Sporrong and Lönnorth complained that it was impossible for them to sell these properties and that it amounted to an interference with their right to peaceful enjoyment of possessions. The Swedish government, by contrast, emphasised the public purpose of the permits system and the intentions of the city of Stockholm to make improvements for the general good. See R. Higgins, op. cit., No. 12 at 276-77.

46. Revere Copper & Brass Inc. v. Overseas Private Investment Corporation, 56 International Legal Materials 258.

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

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

difficult to continue operations, closed operations and claimed compensation under its insurance contract. The Arbitral Tribunal, 47 assuming that the contract was governed by international law, found that there had been a taking by the government and observed:48 “In our view, the effects of the Jamaican Government’s actions in repudiating its long term commitments to RJA [the subsidiary of RC], have substantially the same impact on effective control over use and operation as if the properties were themselves conceded by a concession contract that was repudiated…” Although the insurance agency (OPIC) argued that RJA still had all the rights and property and that it could operate as it did before, the Tribunal responded that “this may be true […] but […] we do not regard RJA’s ‘control’ of the use and operation of its properties as any longer ‘effective’ in view of the destruction by Government action of its contract rights”.

Several BIT Tribunals, in particular in recent years, have retained the criterion of the severity of the impact to qualify an act by state as an expropriation.

In the case CME v. the Czech Republic.49 CME, the Claimant, had purchased a joint venture media company in the Czech Republic and alleged, inter alia, breach of the obligation of the [host country] not to deprive the investor of its investment 50 because of the actions of the national Media Council. The Tribunal, citing inter alia, the Tippets and Metalclad cases, found that an expropriation had occurred because “the Media Council’s actions and omissions…caused the destruction of the [joint-venture’s] operations, leaving the [joint venture] as a company with assets, but without business”.51 It stated also that although “regulatory measures are common in all types of legal and economic systems in order to avoid use of private property contrary to the general welfare of the host state”52 the administrative measures taken by the host country did not fall under this category. It therefore concluded that, “Expropriation of [the company’s] investment is found a consequence of the [host country’s] actions and inactions as there is no immediate prospect at hand that the [joint venture] will be reinstated in a position to enjoy an exclusive use of the license…”53

47. The Tribunal was set up under the American Arbitration Association.

48. For discussion see R. Higgins, pp. 331-37, op. cit., No. 12; Sornarajah, p. 301, op. cit., No. 9 at 301; and R. Dolzer, op. cit., No. 7 at 51-52.

49. CME (Netherlands) v. Czech Republic (Partial Award) (13 September 2001) available at www.mfcr.cz/scripts/hpe/default.asp.

50. Article 5 of the 1991 Bilateral Investment Treaty between the Netherlands and the Czech Republic.

51. See CME, par. 591, p. 166.

52. Idem, par. 603, p. 170.

53. Idem, par. 607, p. 171.

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

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

In Generation Ukraine v. Ukraine,54 a series of acts or omissions by the Kyiv City State Administration, culminating with its failure to provide lease agreements for a construction project of an office building did not constitute a

creeping expropriation since according to the Tribunal:

“… the conduct of the Kyiv City State Administration […] does not come close to creating a persistent or irreparable obstacle to the Claimant’s use, enjoyment or disposal of its investment”.55

The Tribunal explained further:

“A plea of creeping expropriation must proceed on the basis that the investment existed in 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 is violative of the relevant international standard of protection against expropriation. It is conceptually possible to envisage a case of creeping expropriation where the investor’s interests in its investment develop in parallel with the commission of the acts complained of. But such a plea, in order to be successful, would demand a high level of analytical rigorousness and precision that is absent from the submissions before this Tribunal.”56 In Occidental Exploration and Production Company v. the Republic of Ecuador,57 Occidental claimed that Ecuador authorities’ refusal to refund to Occidental the value added tax, which it was entitled under Ecuadorian law, constituted an expropriation. The Tribunal made reference to the Metalclad 58 and CME cases 59 and held that “Ecuador did not adopt measures that could be

considered as amounting to direct or indirect expropriation” since:

“In fact, there has been no deprivation of the use […] of the investment, let alone measures affecting a significant part of the investment. The criterion of ‘substantial deprivation’ under international law identified in Pope & Talbot is not present in this case.”60

54. The Claimant, a US corporation, sought damages in excess of USD 9.4 billion, for alleged harm to its investment in commercial property in Kyiv, Ukraine, namely the “Parkview Office Building Project.” The Claimant contended that it was encouraged by the Ukrainian Government in late 1992 to invest in Ukraine; that it established a local investment company and that, after obtaining approval of the project, it found itself blocked by interference from local administrative authorities over the course of the next six years. Such interference included, inter alia, the alleged final expropriatory act or measure: the Kyiv City State Administration’s “failure to produce revised land lease agreements with valid site drawings”. Generation Ukraine Inc. v. Ukraine, Award, par. 20.1, 20.21, 16 September 2003.

55. Idem, par. 20.32.

56. Idem, par. 20.26.

57. Occidental Exploration and Production Co. v. Ecuador, Award, 1 July 2004. at 80-92.

58. Metalclad Corporation v. United Mexican States (Tribunal Decision 30 August 2000).

59. See op. cit., No. 54.

60. See op. cit., No. 62, par. 89.

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

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

In CMS v. Argentina61 the indirect expropriation claim concerned the suspension by Argentina of a tariff adjustment formula for gas transportation applicable to an enterprise in which the claimant had an investment. The

Tribunal described its task as follows:

“[…] the essential question is […] to establish whether the enjoyment of the property has been effectively neutralised. The standard that a number of tribunals have applied in recent cases where indirect expropriation has been contended is that of substantial deprivation.” Although the Tribunal recognised that the measures under dispute had an important effect on the Claimant’s business, it found no substantial deprivation, and thus no breach of the expropriation article in the US-Argentina BIT, had occurred, noting that “the investor is in control of the investment; the government does not manage the day-to-day operations of the company; and the investor has full ownership and control of the investment”.62 In the first case under the Energy Charter Treaty, Nykomb Synergetics Technology Holding AB, Stockholm v. The Republic of Latvia 63 the Claimant contended that the non-payment of double tariffs constituted an indirect expropriation, since it allegedly resulted in a substantial loss of sales income making the enterprise economically non-viable and its investment worthless.

The Tribunal found that:



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