International Investment Law 2024-25

Federico Ortino

Expropriation
(week 3)
 Law on expropriation:
Rationale
• Political risks facing foreign investment:
– expropriation (including nationalisation) of assets of the
foreign investor
– termination of investment contracts between foreign
investor and host State
• > Host State’s right to take alien property is accepted
but subject to certain conditions (both under
customary international law and treaties)
Text: Germany-Pakistan Art 3 (1959)
• 2. Nationals or companies of either Party shall not be
subjected to expropriation of their investments in the
territory of the other Party except for public benefit
against compensation, which shall represent the
equivalent of the investments affected. […]
• Protocol
– (3) The term "expropriation" within the meaning
of paragraph (2) of Article 3 shall also pertain to
acts of sovereign power which are tantamount to
expropriation, as well as measures of
nationalization.
 Text: NAFTA Art 1110 (1993)
• 1. No Party may directly or indirectly nationalize or
expropriate an investment of an investor of another
Party in its territory or take a measure tantamount
to nationalization or expropriation of such an
investment ("expropriation"), except: (a) for a public
purpose; (b) on a non-discriminatory basis; (c) in
accordance with due process of law and Article
1105(1); and (d) on payment of compensation in
accordance with paragraphs 2 through 6.
• 2. Compensation shall be equivalent to the fair
market value of the expropriated investment […]
 Text: Energy Charter Treaty (1994)
Article 13(1):
"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 (hereinafter referred to as
'Expropriation') except where such Expropriation is:
(a) for a purpose which is in the public interest;
(b) not discriminatory;
(c) carried out under due process of law; and
(d) accompanied by the payment of prompt, adequate
and effective compensation."
Text: China-Netherlands BIT (2001)
ARTICLE 5 EXPROPRIATION
1. Neither Contracting Party shall expropriate, nationalise or
take other similar measures (hereinafter referred to as
"expropriation") against the investments of the investors of
the other Contracting Party in its territory, unless the
following conditions are met:
a) the expropriation is done in the public interest and under
domestic legal procedures;
b) the expropriation is not discriminatory or contrary to any
undertaking which the Contracting Party, which takes such
measures, may have given;
c) the expropriation is done against compensation. Such
compensation shall be equivalent to the fair market value of the
expropriated investment immediately before the expropriation
measures were taken. […]
 Text: UK Model BIT (2008)
(1) Investments of nationals or companies of either
Contracting Party shall not be nationalised,
expropriated or subjected to measures having effect
equivalent to nationalisation or expropriation
(hereinafter referred to as “expropriation”) in the
territory of the other Contracting Party except for a
public purpose related to the internal needs of that
Party on a non-discriminatory basis and against prompt,
adequate and effective compensation. […]
 Text: US Model BIT Art 6 (2012)
• 1. Neither Party may expropriate or nationalize a
covered investment either directly or indirectly
through measures equivalent to expropriation or
nationalization (“expropriation”), except: (a) for a
public purpose; (b) in a non-discriminatory manner;
(c) on payment of prompt, adequate, and effective
compensation; and (d) in accordance with due
process of law and Article 5. […]
 Text: US Model BIT Annex B
• 1. Article 6(1) is intended to reflect customary international law […]
• 2. An action […] cannot constitute an expropriation unless it interferes
with a tangible or intangible property right or property interest in an
investment. […]
• 4. Indirect expropriation is where an action or series of actions by a Party
has an effect equivalent to direct expropriation without formal transfer of
title or outright seizure.
– (a) The determination of whether an action […], 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 […];
• (ii) extent of interference with distinct, reasonable investment-backed
expectations; and
• (iii) the character of the government action.
– (b) Except in rare circumstances, non-discriminatory regulatory actions by a
Party that are designed and applied to protect legitimate public welfare
objectives, such as public health, safety, and the environment, do not
constitute indirect expropriations.
 Analytical frame
• Three key steps in the enquiry:
1. Whether the right that allegedly has been expropriated is
protected by the relevant investment treaty?
2. Whether the State interference did indeed amount to an
“expropriation”?
3. If so, whether it was lawful or unlawful?
• See JD Nelson v Mexico (2020):
“To determine the existence of an unlawful expropriation in breach
of NAFTA Article 1110(1), the Tribunal will follow a three-prong test
that consists in asking: (i) whether there is an investment capable of
being expropriated, (ii) whether that investment has in fact been
expropriated, and (iii) whether the conditions set [forth] in Article
1110(1)(a)-(d) have been satisfied.”
 Forms of expropriation
• Direct expropriation
• Mandatory transfer of title
• Outright physical takings/dispossession
• Indirect expropriation:
• “Taking” without deprivation of legal title
• Ex: new Dutch law banning the generation of coal-
fired power from 2030 (Uniper’s claim)
• How does one determine an ‘indirect’ or ‘de facto’
expropriation? (the $1m question!)
 Forms of expropriation
• Creeping expropriation
• A particular type of indirect expropriation
• Includes measures or a series of measures which in toto
have the effect of expropriation
• Generation Ukraine v. Ukraine, 2003:
– “Creeping expropriation is a form of indirect expropriation with a
distinctive temporal quality in the sense that it encapsulates the
situation whereby a series of acts attributable to the State over a
period of time culminate in the expropriatory taking of such
property”
• Santa Elena v. Costa Rica, 2000, ¶76
– “[A] measure or series of measures can still eventually amount to a
taking, though the individual steps in the process do not formally
purport to amount to a taking or to a transfer of title. What has to
be identified is the extent to which the measures taken have
deprived the owner of the normal control of his property.”
 Forms of expropriation
• Expropriation by governmental/administrative decree
• Expropriation by legislative act
• Expropriation by the judiciary:
– in Saipem v. Bangladesh, an ICSID tribunal concluded that a Supreme
Court decision annulling an ICC award was a judicial taking tantamount
to “measures having similar effects” to an expropriation
– “Such actions resulted in substantially depriving [the investor] of the
benefit of the ICC Award. This is plain in light of the decision of the
Bangladeshi Supreme Court that the ICC Award is ‘a nullity’. Such ruling
is tantamount to a taking of the residual contractual rights arising from
the investments as crystallized in the ICC Awards.” (Saipem, para. 129)
– No expropriation by the national courts if the courts’ termination of the
underlying contracts (and thus of the investor’s contractual rights) is not
illegal (see Swisslion v Macedonia; Arif v Moldova)
 Forms of expropriation
• Two main lines of authority over the last 25 years:
– The “sole effects” doctrine
– The “police powers” doctrine
• ‘radical’
• ‘moderate’ (including proportionality)
• First prevalence of ‘sole-effect’ doctrine > now
‘moderate police powers’ doctrine
 Metalclad v Mexico, Award 30 Aug
2000 (Y)
• 103. Thus, 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 or
reasonably-to-be-expected economic benefit of
property even if not necessarily to the obvious
benefit of the host State.
 Saluka v Czech Republic, Partial Award, 17 March
2006 (N)
• 254. The Tribunal acknowledges that Art 5 of the Treaty in the present case is drafted
very broadly and does not contain any exception for the exercise of regulatory power.
However, in using the concept of deprivation, Art 5 imports into the Treaty the
customary international law notion that a deprivation can be justified if it results from
the exercise of regulatory actions aimed at the maintenance of public order. In
interpreting a treaty, account has to be taken of “any relevant rules of international law
applicable in the relations between the parties” – a requirement which the ICJ has held
includes relevant rules of general customary international law.
• 255. It is now established in international law that States are not liable to pay
compensation to a foreign investor when, in the normal exercise of their regulatory
powers, they adopt in a non-discriminatory manner bona fide regulations that are
aimed at the general welfare. […]
• 262. In the opinion of the Tribunal, the principle that a State does not commit an
expropriation and is thus not liable to pay compensation to a dispossessed alien
investor when it adopts general regulations that are “commonly accepted as within the
police power of States” forms part of customary international law today. […]
 Sole-effect doctrine
• CMS v Argentina, Award 12 May 2005 (N)
• 262. The essential question is therefore to establish whether the
enjoyment of the property has been effectively neutralized. The
standard that a number of tribunals have applied in recent cases where
indirect expropriation has been contended is that of substantial
deprivation. […]
• Telenor v Hungary, Award, 13 September 2006 (N)
• 70. In considering whether measures taken by government constitute
expropriation the determinative factors are the intensity and duration
of the economic deprivation suffered by the investor as the result of
them. There is a divergence of views as to whether the intention or
objectives of the government in introducing the measures may also be
taken into account or whether the sole criterion is the effect of the
government measures, but on the view this Tribunal takes of the effects
of Hungary's actions on Telenor in the present case that is not an issue
that needs to be explored.
 Police powers doctrine
• Methanex v US, Award Merits, 9 Aug 2005 (N)
• 6. In this case, there is no expropriation decree or a creeping expropriation.
Nor was there a “taking” in the sense of any property of Methanex being
seized and transferred, in a single or a series of actions, to California or its
designees. […] it is not a claim for nationalization or expropriation, but for
“measures tantamount to expropriation” […].
• 7. In the Tribunal’s view, Methanex is correct that an intentionally
discriminatory regulation against a foreign investor fulfils a key requirement
for establishing expropriation. But as a matter of general international law, a
non-discriminatory regulation for a public purpose, which is enacted in
accordance with due process and, which affects, inter alios, a foreign investor
or investment is not deemed expropriatory and compensable unless specific
commitments had been given by the regulating government to the then
putative foreign investor contemplating investment that the government
would refrain from such regulation.
• Chemtura v Canada, Award, 2 Aug 2010 (N)
• Phillip Morris v Uruguay, Award, 8 July 2016 (N)
 Sole-effect v Police powers
• By end of 2017, there were overall 359 cases where an
indirect expropriation claim was made:
– while 53 cases out of 359 were still pending, there were 51
cases where the investor’s indirect expropriation claims
had been successful (aside from the question of quantum).
That was approximately, one case out of six.
– in most of the successful cases, the tribunal had adopted
an interpretation of indirect expropriation based on (a
version of) the sole-effect doctrine.
– Exceptions: Tecmed, Award 2003; Tza Yap Shum v Peru,
Award, 2011; Servier v Poland, Award, 2012; Deutsche
Bank v Sri Lanka, Award, 2012; Abengoa v Mexico, Award,
2013; Belokon v Kyrgyzstan, Award, 2014; Quiborax v
Bolivia, Award, 2015; Copper Mesa v Ecuador, Award, 2016
 Sole-effect v Police powers:
general structure
• Sole-effect doctrine:
– Has the investment been deprived?
– >if yes = expropriation
***
• Police-powers doctrine:
– Has the investment been deprived?
– If yes, can the deprivation be justified as a
legitimate exercise of police (regulatory) powers?
– >if not = expropriation
 Sole-effect v Police powers:
Key legal features
• How much deprivation? Substantial v total
• How much of what? The denominator
problem
• What is being deprived? The object of
expropriation
***
• When is the exercise of regulatory (police)
powers legitimate? The proportionality
principle
 Substantial v total deprivation
• Tecmed v Mexico, Award, 28 May 2003
• tribunal asked whether the non-renewal of a permit to operate a waste
landfill “radically deprived [the investor] of the economical use and
enjoyment of its investments, as if the rights related thereto […] had
ceased to exist.” (para 115)
• Venezuela Holdings BV, Mobil Cerro Negro Holding LTD et
al v Venezuela, Award, 9 October 2014 (N)
• 286. The Tribunal has to determine whether the measures referred to
by the Claimants had an effect equivalent to expropriation within the
meaning of Article 6 of the BIT. The Tribunal considers that, under
international law, a measure which does not have all the features of a
formal expropriation may be equivalent to an expropriation if it gives
rise to an effective deprivation of the investment as a whole. Such a
deprivation requires either a total loss of the investment's value or a
total loss of control by the investor of its investment, both of a
permanent nature.
 Substantial v total deprivation
• Chemtura v Canada, Award, 2 Aug 2010
• 249. […] The determination of whether there has been a "substantial
deprivation" is a fact-sensitive exercise to be conducted in the light of
the circumstances of each case. […] One important feature of fact-
sensitive assessments is that they cannot be conducted on the basis of
rigid binary rules. It would make little sense to state a percentage or a
threshold that would have to be met for a deprivation to be "substantial"
as such modus operandi may not always be appropriate. […]
• Enkev Beheer v Poland, First Partial Award, 29 April 2014
• 344. […] the Tribunal considers that the accumulated mass of
international legal materials, comprising both arbitral decisions and
doctrinal writings, describe for indirect expropriation, taking or
deprivation, consistently albeit in different terms, the requirement under
international law for the investor to establish the substantial, radical,
severe, devastating or fundamental deprivation of its rights or their
virtual annihilation and effective neutralisation.
 Substantial v total deprivation
• Hydro Energy et al v Spain (2020)

531. Fourth, expropriation, direct or indirect, entails “substantial

deprivation”, i.e. the loss of all significant economic value, where the loss of
value is such that it could be considered equivalent to a deprivation of
property, or the loss of all attributes of ownership.
532. Fifth, consequently a loss of some of the anticipated returns on
investments in shares may not, depending on the facts, be an expropriation,
and a mere loss in value of an investment, as distinct from interference with
the control or use of the property, is not an indirect expropriation unless
the loss of value is such that it could be considered equivalent to a
deprivation of the investment. It follows that suggestions that a significant or
substantial depreciation in value of the asset amounts to indirect
expropriation may go too far, or must be read in a particular factual context,
and that the true test is whether the measures involve a “substantially
complete deprivation of the economic use and enjoyment of the rights to
the investment, or of identifiable, distinct parts thereof (i.e., approaching
total impairment).
 Substantial v total deprivation
• Expropriation requires a deprivation that is not merely
"ephemeral"
• Muhammet Cap v Turkmenistan, Award (4 May 2021)
• 809. This Tribunal considers indirect expropriation to occur when property or property rights
were interfered with so substantially by the acts of a State that it resulted in substantial,
irreversible and permanent deprivation of the value of the investment or effective loss of
the use, control or management of that investment. In the Tribunal’s view, to constitute
expropriation, the acts, omissions and interferences must affect the value of the whole
investment, not just part(s) of it. Further, it must be proved that the acts complained of
were exercised by the State in its sovereign capacity (its puissance publique), not in the
State’s capacity as a contractual party.

• The inquiry is fact-specific:

• Wena Hotels Limited v Egypt: exclusion from management of a hotel for a period of a year
was held to be expropriatory
• Middle East Cement v Egypt: the revocation of a licence that deprived the investor of
rights granted under the licence for four months, was held to be expropriatory
• SD Myers v Canada: a ban on export for 18 months was held to be not long enough and
therefore non-expropriatory
 The ‘denominator’ problem
• Chemtura v Canada, Award, 2 Aug 2010
• 249. For instance, one could think of cases where one
specific asset (a building, a piece of land, a line of
business) which represents a part of the value of all the
different assets held by a foreign investor in the host State
has been entirely expropriated. In such case, applying a
percentage or threshold approach to the overall assets
held by the investor in the host State would preclude the
deprivation from being “substantial”, whereas applying the
same assessment to the specific asset in question would
lead to the opposite conclusion. Given the diversity of
situations that may arise in practice, it is preferable to
examine each situation in the light of its own specific
circumstances.
 The ‘denominator’ problem
• Philip Morris v Uruguay, Award, 8 July 2016
• 280. The question whether indirect expropriation may relate
to identifiable distinct assets comprising the investment or,
rather, is to be determined considering the investment as a
whole is disputed, with a number of investment treaty cases
supporting one or the other position. The Tribunal is of the
view that the answer largely depends on the facts of the
individual case. […]
• 283. The Tribunal believes that in order to determine whether
the SPR had an expropriatory character in this case, Abal’s
business is to be considered as a whole since the measure
affected its activities in their entirety. This is confirmed by the
fact that in order to mitigate its effects, Abal resorted to
countermeasures involving its business as a whole. […]
 The object of deprivation:
property interest, control or value?
• 1982 United States Model BIT which provides the following indicative
list of ‘measures 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 or economic
value”.
– See 1986 US-Bangladesh BIT (Art III.1)
• ‘use of property’ or the ‘reasonably-to-be-expected economic benefit
of property’ (Metalclad 2000, para 103)
• “[e]xpropriation tend to involve the deprivation of ownership rights”
[…] “expropriation usually amounts to a lasting removal of the ability
of an owner to make use of its economic rights” (SD Myers v Canada
2000, para. 282)
• “if due to the actions of the Respondent, the assets involved have lost
their value or economic use for their holder” (Tecmed 2003, para 115)
 The object of deprivation:
property interest, control or value?
• Mamidoil v Albania, Award, 30 March 2015
• 569. In its literal translation, expropriation describes a specific
effect on property itself and not a damage inflicted to property.
The effect can be a direct taking as it can be an indirect
deprivation of one or several of its essential characteristics.
These are traditionally defined by its use and enjoyment, control
and possession, and disposal and alienation. If one of these
attributes is affected, the resulting loss of value and/or benefit
may lead to a claim for expropriation.
• Philip Morris v Uruguay, Award, 8 July 2016
• 192. […] in order to be considered an indirect expropriation […]
State’s measures should amount to a “substantial deprivation”
of its value, use or enjoyment.
 The object of deprivation:
property interest, control or value?
• Muhammet Cap v Turkmenistan, Award (4 May 2021)
• 809. This Tribunal considers indirect expropriation to
occur when property or property rights were
interfered with so substantially by the acts of a State
that it resulted in substantial, irreversible and
permanent deprivation of the value of the
investment or effective loss of the use, control or
management of that investment. In the Tribunal’s
view, to constitute expropriation, the acts, omissions
and interferences must affect the value of the whole
investment, not just part(s) of it.
 Proportionality
• Tecmed v Mexico, Award, 29 May 2003
• 115. To establish whether the Resolution is a measure equivalent to an
expropriation under the terms of section 5(1) of the Agreement, it must be first
determined if the Claimant […] was radically deprived of the economical use
and enjoyment of its investments […].
• 122. […] in addition to the negative financial impact of such actions or
measures, the Arbitral Tribunal will consider, in order to determine if they are to
be characterized as expropriatory, whether such actions or measures are
proportional to the public interest presumably protected thereby […]. Although
the analysis starts at the due deference owing to the State when defining the
issues that affect its public policy or the interests of society as a whole […], such
situation does not prevent the Arbitral Tribunal […] from examining the actions
of the State in light of Article 5(1) of the Agreement to determine whether such
measures are reasonable with respect to their goals, the deprivation of
economic rights and the legitimate expectations of who suffered such
deprivation. There must be a reasonable relationship of proportionality
between the charge or weight imposed to the foreign investor and the aim
sought to be realized by any expropriatory measure. […]
 Proportionality
• Philip Morris v Uruguay, Award, 8 July
2016
• In order to determine whether “the
adoption of the Challenged Measures by
Uruguay was a valid exercise of the
State’s police powers”, […] “the action
must be taken bona fide for the purpose
of protecting the public welfare, must be
non-discriminatory and proportionate”
(para. 305)
 Proportionality
• Philip Morris v Uruguay, Award, 8 July 2016
• 306. The Challenged Measures were taken by Uruguay with a view to
protect public health in fulfilment of its national and international
obligations. For reasons which will be explored in detail in relation to
claims under Article 3(2) of the BIT, in the Tribunal’s view the Measures
were both adopted in good faith and were non-discriminatory. They
were proportionate to the objective they meant to achieve, quite apart
from their limited adverse impact on Abal’s business. Contrary to the
Claimants’ contention, the Measures were not “arbitrary and
unnecessary” but rather were potentially “effective means to protecting
public health,” a conclusion endorsed also by the WHO/PAHO
submissions. […] the fact remains that the incidence of smoking in
Uruguay has declined, notably among young smokers, and that these
were public health measures which were directed to this end and were
capable of contributing to its achievement. [emphasis added]
• Art 3(2) ‘not arbitrary’: scientific basis (WHO/FCTC); margin of
appreciation/substantial deference (paras 389-420).
 Proportionality
Casinos Austria et al v. Argentina, Award, 5 Nov 2021
334. [I]n distinguishing between compensable indirect expropriation and non-compensable exercises
of a host State's police powers or its right to regulate regard has to be given both to the intensity of
the interference of the measure with the protected investment and to the reason and purpose for
which the host State has taken the measures in question. Under this approach, two elements must be
fulfilled for a government measure to qualify as an indirect expropriation.
335. First, the measure in question must show a certain severity of interference and permanence. To
amount to a measure with equivalent effect to an expropriation, it is not sufficient that the measure has
occasioned a mere decrease of the value of the investment, or that additional costs have been imposed
on the investor. Rather, as required by a long line of arbitral jurisprudence, the measure in question
must have affected the investment in a way that the investor has been deprived permanently and
substantially of the continued use and economic benefits of his or her investment.
336. Second, as equally recognized by a long line of arbitral jurisprudence, the measure in question must
not be covered by the host State's right to exercise its regulatory and police powers, taking into
account both the legal framework in place in the host State when the investment was made and the host
State's power to regulate and change this legal framework for the protection of public interests. In order
to avoid abuse of the host State's regulatory powers, their exercise must be bona fide and in line with
principles of international investment law, such as good faith, non-discrimination, and the prohibition
of arbitrariness, and result in measures whose impact on investments is proportionate to the
interest(s) protected … Alternatively, the exercise of the host State's police and regulatory powers, the
use of which would otherwise be legitimate, can qualify as an indirect expropriation if the host State has
made assurances or entered special commitments that the host State would refrain from such
regulation.
 Proportionality
Eco Oro v Colombia, Award, 5 Nov 2021
627. Whilst these awards indicate that various tribunals have taken different
approaches on the order in which to analyse the issues −do you first determine
whether the criteria for an indirect expropriation are met, and then determine
whether the exception applies, or vice versa?− there is no clear consensus in the
practise. One approach is to consider whether the relevant measure falls within the
exercise of a State’s police powers before moving to a careful assessment of whether
there may have been an expropriation, including consideration of deprivation. […] A
second approach is to consider the threshold issue of whether there has been a
substantial deprivation, before turning to the question of whether the measures at
issue were an exercise by Colombia of its police power. […] In both these approaches,
tribunals have apparently proceeded on the basis that a decision on police powers is
also a decision on whether there has been an indirect expropriation. In other words,
the inquiry into indirect expropriation and police powers is not distinguishable […].
628. A third approach is to evaluate all the relevant facts and then make a decision on
whether the relevant measures were expropriatory or an exercise of the State’s police
powers. Rather than following a two-stage analysis as the first and second approaches
summarised above do, this approach takes all factors into account before reaching a
conclusion. […]
 Proportionality
• Proportionality balancing in the context of the host
State’s exercise of its rights under the investment
contract
• Vigotop v Hungary, Award, 1 Oct 2014
• Three-stage test:
– Hidden political agenda?
– Are there ‘sufficiently well-founded’ contractual grounds
for terminating the contract?
– Did respondent exercise its contractual termination right
legitimately? (including was the termination a
‘disproportionate response to what was a relatively minor
purported contractual breach’?)
 Analytical frame
• Three key steps in the enquiry:
1. Whether the right that allegedly has been expropriated is
protected by the relevant investment treaty?
2. Whether the State interference did indeed amount to an
“expropriation”?
3. If so, whether it was lawful or unlawful?
• See JD Nelson v Mexico (2020):
“To determine the existence of an unlawful expropriation in breach
of NAFTA Article 1110(1), the Tribunal will follow a three-prong test
that consists in asking: (i) whether there is an investment capable of
being expropriated, (ii) whether that investment has in fact been
expropriated, and (iii) whether the conditions set [forth] in Article
1110(1)(a)-(d) have been satisfied.”
 Expropriation of contracts?
• Sovereign conduct:
“for the behaviour of the State as party to a contract to be
considered a breach of an investment treaty, such behaviour
must be beyond that which an ordinary contracting party could
adopt and involve State interference with the operation of the
contract …” (Siemens v. Argentina)
“tribunals have made a distinction between acta iure imperii
and acta iure gestionis, that is to say, actions by a State in
exercise of its sovereign powers and actions of a State as a
contracting party. It is the use by a State of its sovereign
powers that gives rise to treaty breaches, while actions as a
contracting party merely give rise to contract claims not
ordinarily covered by an investment treaty.” (Suez v. Argentina)
 Expropriation of contracts?
• Expropriation v non-performance
“The mere non-performance of a contractual obligation is not
to be equated with a taking of property, nor (unless
accompanied by other elements) is it tantamount to
expropriation…. [T]he normal response by an investor faced
with a breach of contract by its governmental counter-party
(the breach not taking the form of an exercise of governmental
prerogative, such as a legislative decree) is to sue in the
appropriate court to remedy the breach. It is only where such
access is legally or practically foreclosed that the breach could
amount to a definitive denial of the right (i.e., the effective
taking of the chose in action) and the protection of Article 1110
[‘Expropriation’] be called into play.” (Waste Management v.
Mexico II)
 Property rights v personal rights?
• Accession Mezzanine v Hungary, Award, 17 April 2015
147. The Respondent submits that only property rights are capable of being the
object of an expropriation. Although the Tribunal need not decide this question in
light of its previous findings, it is important to recognise that there is a profound
difference between property rights and purely personal rights in the context of
adjudging a claim for expropriation. The defining characteristic of a property right is
that it is capable of alienation or assignment. One investor’s property right might
just as well be the property of another investor or of the state. It is precisely
because property rights can be alienated or assigned that makes them susceptible
to being appropriated or expropriated. What cannot, on the other hand, be
appropriated or expropriated are personal rights because the right is not separable
in law from the person who has it. A personal right cannot enter circulation in a
market like a property right can. By way of example, taxi licenses in some countries
are capable of alienation and hence are a property right. But it is unlikely that a
licence to practise medicine is alienable in any country because it cannot be
separated from the person to whom it is granted. It is not, therefore, a property
right.
148. […] it makes no sense to talk about the annulment [of a licence to practice
medicine] as an “expropriation”.
 Analytical frame
• Three key steps in the enquiry:
1. Whether the right that allegedly has been expropriated is
protected by the relevant investment treaty?
2. Whether the State interference did indeed amount to an
“expropriation”?
3. If so, whether it was lawful or unlawful?
• See JD Nelson v Mexico (2020):
“To determine the existence of an unlawful expropriation in breach
of NAFTA Article 1110(1), the Tribunal will follow a three-prong test
that consists in asking: (i) whether there is an investment capable of
being expropriated, (ii) whether that investment has in fact been
expropriated, and (iii) whether the conditions set [forth] in Article
1110(1)(a)-(d) have been satisfied.”
 Text: Energy Charter Treaty (1994)
Article 13(1):
"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 (hereinafter
referred to as 'Expropriation') except where such Expropriation is:
(a) for a purpose which is in the public interest;
(b) not discriminatory;
(c) carried out under due process of law; and
(d) accompanied by the payment of prompt, adequate and effective compensation.
Such compensation shall amount to the fair market value of the Investment
expropriated at the time immediately before the Expropriation or impending
Expropriation became known in such a way as to affect the value of the Investment
(hereinafter referred to as the "Valuation Date").
Such fair market value shall at the request of the Investor be expressed in a Freely
Convertible Currency on the basis of the market rate of exchange existing for that
currency on the Valuation Date. Compensation shall also include interest at a
commercial rate established on a market basis from the date of Expropriation until
the date of payment.”
Text: China-Netherlands BIT (2001)
ARTICLE 5 EXPROPRIATION
1. Neither Contracting Party shall expropriate, nationalise or
take other similar measures (hereinafter referred to as
"expropriation") against the investments of the investors of
the other Contracting Party in its territory, unless the
following conditions are met:
a) the expropriation is done in the public interest and under
domestic legal procedures;
b) the expropriation is not discriminatory or contrary to any
undertaking which the Contracting Party, which takes such
measures, may have given;
c) the expropriation is done against compensation. Such
compensation shall be equivalent to the fair market value of the
expropriated investment immediately before the expropriation
measures were taken. […]
 Text: UK Model BIT (2008)
(1) Investments of nationals or companies of either Contracting
Party shall not be nationalised, expropriated or subjected to
measures having effect equivalent to nationalisation or
expropriation (hereinafter referred to as “expropriation”) in
the territory of the other Contracting Party except for a
public purpose related to the internal needs of that Party on
a non-discriminatory basis and against prompt, adequate
and effective compensation. Such compensation shall
amount to the genuine value of the investment
expropriated immediately before the expropriation or
before the impending expropriation became public
knowledge, whichever is the earlier, shall include interest at
a normal commercial rate until the date of payment, shall
be made without delay, be effectively realizable and be
freely transferable. […]
Are legality conditions cumulative?
• Crystallex v Venezuela (2016):

“When a treaty cumulatively requires several conditions for a lawful

expropriation, arbitral tribunals seem uniformly to hold that failure of
any one of those conditions entails a breach of the expropriation
provision”.

• Some controversy as to whether non-payment of

compensation, without more, renders the expropriation
unlawful and the treaty standard of compensation
inapplicable >
 Is non-payment of compensation sufficient to deem expropriation
unlawful?
• Unglaube v Costa Rica, Award 16 May 2012
305. In the present case, the conduct of the State did not conform to the terms of Article 4(2).
Specifically, the violation of the Treaty that rendered Respondent’s action internationally
unlawful (both under the Treaty and under customary international law), was that adequate
compensation, meeting the standards of Article 4(2), was not, in fact, paid to Mrs. Unglaube
within a reasonable period of time after the State declared its intention to expropriate.

• Tidewater v Venezuela, Award 13 May 2015

140. [The World Bank Guidelines] thus reinforce the conclusion of the Tribunal that an
expropriation wanting only a determination of compensation by an international tribunal is
not to be treated as an illegal expropriation […] the amount of such compensation will be
acceptable if determined ‘by a tribunal … designated by the Parties.’ It follows that such a
tribunal must have an opportunity to make its determination as to compensation. Where such a
tribunal has done so (and assuming that the other conditions are met) the expropriation will not
be illegal.

• UP and C.D Holding Internationale v Hungary, Award 9 October 2018

411. It is undisputed that no compensation was offered or paid by Respondent after the
2011 Reform. For that reason alone, it is clear that Respondent breached Art. 5(2) of the
 Public purpose
• UP and C.D Holding Internationale v Hungary, Award 9
October 2018
[Claims arising out of the enactment of legislation in 2011 granting the Government a monopoly over
the prepaid corporate food vouchers industry, which allegedly expropriated the claimant’s
investments]
412. Nevertheless, in view of the respective discussions of the Parties, the Tribunal will
consider the other criteria that may be relevant for the lawfulness of the
dispossessions.
413. It is recalled that Art. 5(2) expressly provides that a dispossession may be
permitted “for reasons of public necessity[.]” The Tribunal notes that this wording
seems to provide a higher threshold than that found in similar BIT provisions requiring
that the dispossessing measure must be for “public purpose.”
414. It is undisputed that the fringe benefit legislation in general was for the public
purpose of ensuring a better nutrition and food supply for employees in Hungary.
However, as already elaborated above, Respondent’s purpose of the 2011 Reform was
to exclude the Non-Hungarian issuers from the Hungarian voucher market. Respondent
has admitted that the 2011 Reform was intended to keep the profit previously “realized
by foreign-owned companies” within Hungary. The public policy goal of keeping profits
within the country is not a legitimate public purpose under Art. 5(2) of the BIT.
 Non-discriminatory
• UP and C.D Holding Internationale v Hungary,
Award 9 October 2018
415. Article 5(2) also expressly provides that the dispossession measures
must not be “discriminatory.” While, in view of the lack of compensation in
the present case, this criteria is not needed to establish Respondent’s breach
of Art. 5(2). The Tribunal notes that the above conclusion that the 2011
Reform was intended to and in fact did exclude CD Hungary and the two
other foreign investors from the market, also renders the 2011 Reform
discriminatory. This was also confirmed by the decision of the CJEU,635
though the criteria of European law are obviously different.
 Due process
• ADC v Hungary, Award 2 October 2006
• [A 2001 Hungarian decree voided the claimants’ contracts for the operation and
management of the Budapest airport. The airport was subsequently taken over by the
State in 2002, but then privatised in 2005]
• 435. [D]ue process of law, in the expropriation context, demands an actual and
substantive legal procedure for a foreign investor to raise its claims against the
depriving actions already taken or about to be taken against it. Some basic legal
mechanisms, such as reasonable advance notice, a fair hearing and an unbiased
and impartial adjudicator to assess the actions in dispute, are expected to be
readily available and accessible to the investor to make such legal procedure
meaningful. In general, the legal procedure must be of a nature to grant an
affected investor a reasonable chance within a reasonable time to claim its
legitimate rights and have its claims heard.

• Koch v Venezuela (2017)

• “As to due process, the Tribunal does not consider that it here required advance
notice of the Expropriation Decree – not under the Treaty, customary
international law or Venezuelan law”.
 Compensation
• Treaty Standard of Compensation: typically “fair market value” (FMV) or
“market value”

• Other formulations sometimes appear–e.g., “genuine,” “actual,” or “true”

value.

• FMV is generally defined as:

“the price, expressed in terms of cash equivalents, at which property would change
hands between a hypothetical willing and able buyer and a hypothetical willing and
able seller, acting at arm’s length in an open and unrestricted market, when neither is
under compulsion to buy or sell and when both have reasonable knowledge of the
relevant facts.”
International Glossary of Business Valuation Terms

• Objective standard
 Lawful v Unlawful Expropriation:
Relevance of distinction
• Lawful expropriation
Lawful expropriation Unlawful expropriation
• Unlawful expropriation
Remedy Compensation Reparation under customary intl
law > Restitution or
compensation
Standard of Treaty standard Customary intl law standard
compensation

Date of valuation Fair compensation Compensation valued at

represented by the value the date of the award or
of the undertaking at the date of expropriation,
moment of whichever is higher
dispossession
 Customary Intl Law Standard
• The Chorzów Factory Case (Germany/Poland) (1928)
“Reparation must, as far as possible, wipe out all the consequences of the illegal act
and re-establish the situation which would, in all probability, have existed if that act
had not been committed. Restitution in kind, or, if this is not possible, payment of a
sum corresponding to the value which a restitution in kind would bear; the award, if
need be, of damages for loss sustained which would not be covered by the restitution
in kind or payment in place of it—such are the principles which should serve to
determine the amount of compensation due for an act contrary to international law”.

• ILC Article 34 Forms of Reparation

• Full reparation for the injury caused by the internationally wrongful act shall take
the form of restitution, compensation and satisfaction, either singly or in
combination, in accordance with the provisions of this chapter.
• ILC Articles 36 Compensation
• The State responsible for an internationally wrongful act is under an obligation to
compensate for the damage caused thereby, insofar as such damage is not made
good by restitution.
• The compensation shall cover any financially assessable damage including loss of
 Customary Intl Law

• Restitution (first)
• Compensation (second)
– When restitution is unavailable or inadequate
• In practice, claimant retains right to elect type of
relief
– Often seek damages because relationship with State has
deteriorated but handful of exceptions:
• Von Pezold v Zimbabwe (2015) – Tribunal found restitution to be
the appropriate remedy (State made to return farms)
• Arif v Moldova (2013) – Tribunal gave the parties an option of
restitution (State could offer a new lease, which investor had a
choice to accept, or State could pay damages)
 Compensation for unlawful expropriation
Siemens v Argentina (2007)
“The key difference between compensation under the Draft Articles and the Factory at Chorzów
case formula, and Article 4(2) of the Treaty is that under the former, compensation must take into
account ‘all financially assessable damage’ or ‘wipe out all the consequences of the illegal act’ as
opposed to compensation ‘equivalent to the value of the expropriated investment’ under the
Treaty. Under customary international law, Siemens is entitled not just to the value of its
enterprise as of May 18, 2001, the date of expropriation, but also to any greater value that
enterprise has gained up to the date of the Award, plus any consequential damages.”

Yukos v Russia (2014)

“Neither the text of Article 13 of the ECT nor its travaux provide a definitive answer to the
question of whether damages should be assessed as of the date of expropriation or the date of
the award. The text of Article 13, after specifying the four conditions that must be met to render
an expropriation lawful, provides that for “such” an expropriation, that is, for a lawful
expropriation, damages shall be calculated as of the date of the taking. A contrario, the text of
Article 13 may be read to import that damages for an unlawful taking need not be calculated as
of the date of taking. It follows that this Tribunal is not required by the terms of the ECT to assess
damages as of the time of the expropriation. Moreover, conflating the measure of damages for a
lawful taking with the measure of damages for an unlawful taking is, on its face, an unconvincing
option”.