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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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“[…] ‘regulatory takings’ may under the circumstances amount to expropriation or the equivalent of an expropriation. The decisive factor for drawing the border line towards expropriation must primarily be the degree of possession taking or control over the enterprise the disputed measures entail. In the present case, there is no possession taking of [Windau] or its assets, no interference with the shareholder’rights or with the management’s control over and running of the enterprise – apart from ordinary regulatory provisions laid down in the production license, the off-take agreement, etc.” Duration of the regulation. The duration of the regulation could be another criterion of whether the regulation has had a severe enough impact on property to constitute a taking.64, 65

61. CMS Gas Transmission Company v. Argentine Republic, Award, 12 May 2005, at par. 262.

62. Idem, par. 263.

63. Nykomb Synergetics Technology Holding AB, Stockholm v. The Republic of Latvia, Award, 16 December 2003, at 4.3.1.

64. J.M. Wagner, “International Investment, Expropriation and Environmental Protection”, Golden Gate University Law Review (1999), Vol. 29, No. 3, pp. 465-538.

65. Prof Christie, in its 1962 article, discusses when a “temporary seizure” ripens into an expropriation, op. cit. No. 25.

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 Iran-United States Claims Tribunal has acknowledged this was an issue but it has had little difficulty in finding that the appointment of “temporary” managers may constitute a taking of property, when the consequent deprivation of property rights is not “merely ephemeral” (in Tippetts, Phelps Dodge and Saghi cases).

A widely cited example where the temporal factor has played an important role is the 1979 case of Hauer v. Land Rheinland-Pfalz, 66 The facts relate to a German winegrower who had to apply for a state permit for planting new vines. While the application was pending, the European Commission issued an order prohibiting the planting of that type of vine for three years. The plaintiff brought her claim before the European Court of Justice which found that there was no violation of Hauer’s property rights emphasising in particular that the EEC order was to be valid only for a transitory period of three years.

In S.D. Myers v. Canada,67 the NAFTA Tribunal accepted that “in some contexts and circumstances it would be appropriate to view a deprivation as amounting to an expropriation even if it were partial and temporary”.

However, it concluded that Canada’s initiative “was only valid for a time”.

Under these circumstances, “an opportunity was delayed” but no indirect expropriation could be found.

Economic impact as the exclusive criterion. There is no serious doubt that the severity of the impact upon the legal status and the practical impact on the owner’s ability to use and enjoy his/her property is one of the main factors i n d e t e rm in in g w h eth e r a re g ula t ory m e as ure e ffe c ts an in di re ct expropriation. What is more controversial “is the question of whether the focus on the effect will be the only and exclusive relevant criterion – ‘sole effect doctrine’ – or whether the purpose and the context of the governmental measure may also enter into the takings analysis”.68 The outcome in any case may be affected by the specific wording of the particular treaty provision.

From the doctrine and the case examination, it seems however that the balanced approach is pre-dominant.

A few cases have focused on the effect of the owner as the main factor in discerning a regulation from a taking. In the Tippetts case, the Iran-United

States Tribunal held that:

“the intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact.”

66. See R. Higgins, op. cit., No. 12; Dolzer, op. cit., No. 7; Ruiz Fabri, op. cit., No. 29.

67. See op. cit., No. 6.

68. Dolzer, see op. cit., No. 2. at 79.

62 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 the Phelps Dodge case,69 a transfer of management was made pursuant to a pre-revolutionary law designed to prevent the closure of factories, ensure payments due to the workers, and protect any debts owed to the Government, which in this case included loans made by a bank that had been nationalised

in 1979. Citing Tippetts, the Iran-United States Tribunal stated that:

“The Tribunal fully understands the reasons why the respondent felt compelled to protect its interests through this transfer of management, and the Tribunal understands the financial, economic and social concerns that inspired the law pursuant to which it acted, but those reasons and concerns cannot relieve the Respondent of the obligation to compensate Phelps Dodge for its loss.” In the Metalclad case,70 in the context of the NAFTA, Metalclad alleged that its subsidiary COTERIN’s attempt to operate a hazardous waste landfill that it constructed in the municipality of Guadalcázar, had been thwarted by measures attributable to Mexico. Metalclad commenced an action under the NAFTA, claiming that an ecological decree promulgated after the claim was made, violated Article 1110 requiring compensation for expropriation. The Tribunal found a violation of NAFTA Article 1110 and stated that in order to decide on an indirect expropriation, it “need not decide or consider the motivation, nor intent





of the adoption of the Ecological Decree”. The Tribunal stated:

“Expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use of reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.” The case Compañía del Desarrollo de Santa Elena v. Costa Rica,71 although referred to a direct expropriation, not an indirect taking, has attracted p a rti c ul ar at t e n t io n be c a us e t h e p a n e l e x pre s s ly s t a te d t h a t t h e environmental purpose had no bearing on the issue of compensation. In this case, the claimant (Company Santa Elena) was formed primarily for the purpose of purchasing Santa Elena – a 30 kilometre terrain in Costa Rica – with the intention of developing it as a tourist resort. In 1978, Costa Rica issued an expropriation decree for Santa Elena aiming at declaring it a preservation site.

Twenty years of legal proceedings between the Parties finally ended with a decision by an ICSID panel. While this case concerns a direct expropriation

69. Phelps Dodge, 10 Iran-United States Cl. Trib. Rep. at 130.

70. See op. cit., No. 63.

71. Compañía del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, ICSID Case No. ARB/96/1. (17 February 2000).

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

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

where the issue was the day of the taking for purposes of determining compensation, the pane l, citing the Tippetts case, indicated that a compensable expropriation could occur through measures of a state which deprives the owner of “access to the benefit and economic use of his property”

or “has made those [property] rights practically useless”. The panel held that:

“While an expropriation or taking for environmental reasons may be classified as a taking for a public purpose, and thus be legitimate, the fact that the property was taken for this reason does not affect either the nature or the measure of the compensation to be paid for the taking. That is, the purpose of protecting the environment for which the Property was taken does not alter the legal character of the taking for which adequate compensation must be paid.72 The international source of the obligation to protect the environment makes no difference.”

It also added that:

“Expropriatory environmental measures – no matter how laudable and beneficial to society as a whole – are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.” 3.1.2. Character of governmental measures, i.e. the purpose and the context of the governmental measure A very significant factor in characterising a government measure as falling within the expropriation sphere or not, is whether the measure refers to the State’s right to promote a recognised “social purpose”73 or the “general welfare”74 by regulation. “The existence of generally recognised considerations of the public health, safety, morals or welfare will normally lead to a conclusion that there has been no ‘taking’.”75 As one commentator has noted, “non-discriminatory measures related to anti-trust, consumer protection, securities, environmental protection, land planning are non-compensable takings since they are regarded as essential to the functioning of the state”.76

72. For this reason, the Tribunal did not analyse the detailed evidence submitted regarding what Costa Rica referred to as its international obligations to preserve the unique Santa Elena ecological site.

73. The Iran-US Claims Tribunal: Its contribution to the Law of State Responsibility, see op. cit., No. 6 at 200.

74. See B.H. Weston, op. cit., No. 3 at 116.

75. Christie, see op. cit., No. 25 at 338.

76. M. Sornarajah, op. cit., No. 9.

64 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 the context of the jurisprudence of the European Court of Human Rights the State may affect control on activities by individual by imposing restrictions which may take the form of planning controls, environmental orders, rent controls, import and export laws, economic regulation of professions, [and] the seizure of properties for legal proceedings or inheritance laws”.77 In the context of the Article 1 of Protocol 1 of the European Convention of Human Rights, the European Court has given States a very wide margin of appreciation concerning the establishment of measures for the public interest and has recognised that it is for national authorities to make the initial assessment78 of the existence of a public concern warranting measures that result in a “deprivation” of property. The Court held that the state’s judgement should be accepted unless exercised in a manifestly unreasonable way.

In addition, the Court has adopted a common approach to “deprivations” and “controls” of use of property. In either case, there has to be a reasonable and foreseeable national legal basis for the taking, because of the underlying principle in stability and transparency and the rule of law.79 In relation to either deprivation or control of use, the measures adopted must be proportionate. The Court examines whether the interference at issue strikes a reasonable balance between the demands of the general interest of the community and the private interests of the alleged victims of the deprivation and whether an unjust burden has been placed on the claimant. In order to make this assessment, the Court proceeds into a factual analysis insisting that precise factors which are needed to be taken into account vary from case to

case. In the James case80 for example, the Court said that:

“The taking of property in pursuance of a policy calculated to enhance social justice within the community can properly be described as being ‘in the public interest’. In particular, the fairness of a system of law governing the contractual or property rights of private parties is a matter of public concern and therefore legislative measures intended to bring about such fairness are capable of being in the ‘public interest’, even if they involve the compulsory transfer of property from one individual to another.”

77. See D.J. Harris et al., referring to the jurisprudence of the European Court of Human Rights in the “Law of the European convention on Human Rights”, (1995) at 535.

78. The state margin of appreciation is justified by the idea that national authorities have better knowledge of their society and its needs, and are therefore “better placed than [an] international [court] to appreciate what is in the public interest’”.

See James v. United Kingdom, 98 Eur. Ct. H.R. (ser. A) 9, 32 (1986).

79. See H. Mountfield, “Regulatory Expropriations in Europe: the Approach of the European Court of Human Rights”, N.Y.U. Environmental Law Journal, Vol. 11, No. 1, 2002, pp. 136-147.

80. This case concerns a reform undertaken by the United Kingdom regarding the right of individuals with long leases to acquire the freehold of their leasehold property. This reform, according to James, the Claimant, “deprived” the freeholders of their property since they could neither refuse to sell nor set the price for it. See op. cit. No. 82.

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 the Sporrong and Lönnroth v. Sweden case, the Court stated that Article 1

contains “three distinct rules”:



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