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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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“The first rule, which is of a general nature, enounces the principle of peaceful enjoyment of property; it is set out in the first sentence of the first paragraph. The second rule covers deprivation of possessions and subjects it to certain conditions; it appears in the second sentence in the same paragraph. The Third rule recognises that the States are entitled, amongst other things, to control the use of property in accordance with the general interest, by enforcing such laws as they deem necessary for the purpose; it is contained in the second paragraph.” The European Court of Human Rights found no expropriation as a result of the first test, yet found compensation to be required as a result of the second test. Under the “fair balance test”, it found that over the years the state had failed to take proper account of individual interests involved. Since the state had neither shortened the temporal effect of the rules nor paid compensation, the court rules that the State had placed “an individual and excessive burden” on plaintiffs and therefore acted in violation of Article 1.

In the NAFTA context, in the S.D. Myers case,81 the Tribunal found that the expression “tantamount to expropriation” in NAFTA’s Article 1110(1), was

understood as “equivalent to expropriation” and added:

“Both words require a tribunal to look at the substance of what has occurred and not only at form. A tribunal should not be deterred by technical or facial considerations from reaching a conclusion that an expropriation or conduct tantamount to an expropriation has occurred. It must look at the real interests involved and the purpose and effect of the government measure.” In Marvin Roy Feldman Karpa v. United Mexican States82 the Tribunal

explained that:

“… the ways in which governmental authorities may force a company out of business, or significantly reduce the economic benefits of its business, are many. In the past, confiscatory taxation, denial of access to infrastructure or necessary raw materials, imposition of unreasonable regulatory reg imes, amon g oth ers, have been considered to be expropriatory actions. At the same time, governments must be free to act in the broader public interest through protection of the environment, new or modified tax regimes, the granting or withdrawal of government subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and the like. Reasonable governmental regulation of this type

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

cannot be achieved if any business that is adversely affected may seek compensation, and it is safe to say that customary law recognises this”.

In the case of Técnicas Medioambientales Tecmed S.A, v. The United Mexican States,83 the investor, Técnicas Medioambientales Tecmed, S.A., filed a claim with ICSID alleging that the Mexican government’s failure to re-license its hazardous waste site contravened various rights and protections set out in the bilateral investment treaty (BIT) between Spain and Mexico and was an expropriatory act. The Tribunal in order to determine whether the acts undertaken by Mexico were to be characterised as expropriatory, citing the ECHR’s practice, considered “w he ther such actions or measure s are proportional to the public interest presumably protected thereby and the protection legally granted to investments, taking into account that the significance of such impact plays a key role in deciding the proportionality”.84 It added that: “there must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realised by an expropriatory measure.”85 “Police Powers” of the State. The notion that the exercise of the State’s “police powers” will not give rise to a right to compensation has been widely accepted in international law. However, the “police powers” doctrine is viewed by some not as a criterion which is weighed in the balance with other factors, but as a controlling element which exempts automatically the measure from any duty for compensation.

One commentary on the law on expropriation and the State’s “police powers” is the commentary to the American Law Institute’s Restatement (Third) of Foreign Relations Law of the United States86 which was designed to assist, inter alia, in determining how to distinguish between an indirect expropriation and valid governmental regulation: “… 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 the states, if it is not discriminatory…” In the context of the Iran-United States Claims Tribunal, the only award in which an allegation of taking was rejected on the grounds of police power regulations was Too v. Greater Modesto Insurance Associates, 87 where the

83. Tecnicas Medioambientales Tecmed S.A, v. The United Mexican States, ICSID Award Case No. ARB (AF)/00/2.

84. Idem, par. 122.

85. Idem.





86. Restatement of the Law Third, op. cit., No. 20, Section 712, Comment g.

87. Award, 29 December 1989, 23 Iran-United States Cl. Trib. Rep.378. See also Seddigh and G. H. Aldrich, op. cit., No. 31.

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

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

claimant sought compensation for the seizure of his liquor licence by the

United States Internal Revenue Service. The Tribunal said:

“… A State is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation or any other action that is commonly accepted as within the police power of States, provided it is not discriminatory and is not designed to cause the alien to abandon the property to the State or to sell it at a distress price…” The Tribunal in the Lauder v. The Czech Republic 88 case said about the interference with property rights that, “… Parties to [the Bilateral] Treaty are not liable for economic injury that is the consequence of bona fide regulation within the accepted police powers of the State”.

In the case of Técnicas Medioambientales Tecmed S.A, v. The United Mexican States,89 although the Tribunal found an expropriation, it has stated that: “the principle that the State’s exercise of its sovereign power within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever is undisputable.” 3.1.3. Interference of the measure with reasonable investment-backed expectations Another criterion identified is whether the governmental measure affects the investor’s reasonable expectations. In these cases the investor has to prove that his/her investment was based on a state of affairs that did not include the challenged regulatory regime. The claim must be objectively reasonable and not based entirely upon the investor’s subjective expectations.

In the 1934 Oscar Chinn90 case, the Permanent Court of International Justice (P.C.I.J.) did not accept the contention of indirect taking91 noting that, in those circumstances, a granting of a de facto monopoly did not constitute a violation of international law and that “favourable business conditions and good will are transient circumstances, subject to inevitable changes”:92 “No enterprise […] can escape from the chances and hazards resulting from general economic conditions. Some industries may be able to make large

88. Lauder (U.S.) v. Czech Republic (Final Award) (3 September 2002), available at www.mfcr.cz/scripts/hpe/default.asp.

89. See op. cit., No. 88.

90. See op. cit., No. 6.

91. The P.C.I.J. employed “effective deprivation”, as the standard for determining if the interference was sufficiently serious to constitute a compensable taking.

92. H. Seddigh, “What level of Host State Interference Amounts to a Taking under Contemporary International Law? Journal of World Investment, 2001, Vol. 2, No. 4, pp. 631-84 at 646.

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profits during a period of general prosperity, or else by taking advantage of a treaty of commerce or of an alteration in customs duties; but they are also exposed to the danger of ruin or extinction if circumstances change. Where this is the case, no vested rights are violated by the State.” The Iran-US Claims Tribunal in Starett Housing Corp. v. Iran93 took into

account the reasonable expectations of the investor:

“Investors in Iran, like investors in all other countries, have to assume a risk that the country might experience strikes, lock-outs, disturbances, changes of economic and political system and even revolution. That any of these risks materialised does not necessarily mean that property rights affected by such events can be deemed to have been taken.”

The Tribunal in Metalclad v. The United Mexican States stated that:

“… Metalclad was led to believe, and did believe, that the federal and state permits allowed for the construction and operation of the landfill”94. It held that expropriation includes deprivation in whole or in significant part of the use or “reasonably to-be-expected economic benefit of property”95.

In Marvin Roy Feldman Karpa (CEMSA) v. The United Mexican States 96 the NAFTA Tribunal noted as part of its reasoning denying the expropriation

claim:

“Governments, in their exercise of regulatory power, frequently change th ei r law s an d reg ulation s i n res po ns e to cha ng ing e con omi c circumstances or changing political, economic or social considerations.

Those changes may well make certain activities less profitable or even uneconomic to continue…” In Técnicas Medioambientales Tecmed S.A, v. The United Mexican States,97 the Tribunal attempted to determine whether the Mexican government’s measures were “reasonable with respect to their goals, the deprivation of economic rights and the legitimate expectations of who suffered such deprivation”. “… Even before the Claimant made its investment, it was widely known that the investor expected its investments in the Landfill to last for a long term and that it took this into account to estimate the time and business required to recover such investment and obtain the expected return upon making its tender offer for the acquisition of the assets related to the Landfill.

To evaluate if the actions attributable to the Respondent – as well as the Resolution98 – violate the Agreement, such expectations should be considered

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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

leg itimate and should be evaluated in light of the Agreement and of international law.”99 Based on this and the fact that the “Resolution” was not proportionate to the “infringements”100 by Tecmed, the Tribunal found that the “Resolution” and its effects amounted to an expropriation.

In Occidental v. Ecuador, 101 the Tribunal acknowledge the reasonable

expectations by the investor as a factor for determining an expropriatory act:

“… there has been no deprivation of the use or reasonably expected economic benefit of the investment…” [emphasis added].

3.2. State practice As a response to the growing jurisprudence in this field, the recently concluded US-Free Trade Agreements with Australia, 102 Chile, 103 Dominican Republic-Central America, 104 Morocco 105 and Singapore 106 and the new US model BIT107 provide explicit criteria of what constitutes an indirect

expropriation. In the Annexes on Expropriation, they state that:

The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a

case-by-case, fact-based inquiry that considers, among other factors:

i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;

ii) the extent to which the government action interferes with distinct, reasonable, investment-backed expectations; and iii) the character of the government action.

99. See op. cit., No. 88, par. 50.

100. All the infringements committed were either remediable or remediated or subject to minor penalties”. Idem par. 148.

101. See op. cit. No. 62.

102. US-Australia Free Trade Agreement signed on 1 March 2004, [Annex 11-B, Article 4(b)].

103. The US-Chile Free Trade Agreement was signed on 6 June 2003 (Annex 10-D).

104. US – Dominican Republic-Central America Free Trade Agreement signed on 5 August 2004, (Annex 10-C). The countries Parties to the Agreement are: Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and the United States.

105. US-Morocco Free Trade Agreement signed on 15 June 2004 (Annex 10-B).

106. US Trade representative Robert Zoellick to Singapore Minister of Trade and Industry, George Yeo on 6 May 2003.

107. For the text of the model BIT see www.state.gov/documents/organization/38710.pdf.

70 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 addition, they address indirect expropriation and the right to regulate:



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