Definition of Expropriation in Investment Arbitration
Expropriation in investment arbitration refers to the act of a host state seizing, restricting, or interfering with a foreign investor’s property rights, which may result in the investor losing control, value, or use of their investment[1]. This concept has been widely discussed in Bilateral Investment Treaties (BITs), Multilateral Investment Treaties, and arbitral jurisprudence, and plays a crucial role in determining the limits of state power over foreign investments. Expropriation can occur in multiple forms, with international law primarily distinguishing between direct and indirect expropriation based on the nature and degree of state interference[2].
- Forms of Expropriation in Investment Arbitration
Direct Expropriation: This occurs when a government formally transfers ownership of an investor’s asset to itself or a third party, often through nationalization or confiscation. Direct expropriation is usually accompanied by compensation, although disputes arise when the compensation is inadequate or delayed.
Example: In Libyan American Oil Company (LIAMCO) v. Libya[3], the Libyan government nationalized foreign oil concessions, leading to an arbitration claim for direct expropriation.
Indirect Expropriation: Unlike direct expropriation, indirect expropriation occurs when a state’s actions substantially deprive an investor of the enjoyment, use, or value of their investment, even without a formal transfer of ownership. Such measures could include excessive regulations, taxation, revocation of licenses, or environmental policies that significantly impact an investment.
Example: In Metalclad Corporation v. Mexico[4], Mexico’s refusal to grant a construction permit and subsequent declaration of an investor’s property as an ecological reserve was found to constitute indirect expropriation, requiring compensation.
- Legal Standards for Expropriation under Investment Treaties
Most International Investment Agreements (IIAs), including BITs and Free Trade Agreements (FTAs), set specific conditions under which expropriation is deemed lawful. These conditions typically include:
Public Purpose[5]: The expropriation must be carried out for a legitimate public interest, such as infrastructure development, public welfare, or environmental protection. However, arbitral tribunals have questioned whether governments use “public purpose” as a pretext for targeting specific investors.
Non-Discrimination[6]: The expropriation must not single out foreign investors unfairly compared to domestic investors. The principle of national treatment and most-favored-nation (MFN) treatment under BITs ensures that foreign investors receive the same legal protections as domestic entities.
Due Process[7]: Expropriation must follow legal procedures, allowing investors the right to challenge state actions through judicial or arbitral mechanisms. Denial of due process could lead to arbitral tribunals declaring the expropriation unlawful.
Prompt, Adequate, and Effective Compensation: The standard for compensation in expropriation cases is largely based on the Hull Formula, which requires that compensation be paid promptly, be adequate in amount, and be effectively realizable in convertible currency. This principle has been widely accepted but remains controversial in cases where states argue they lack sufficient resources to compensate investors.
[1] Dolzer, Rudolf, & Schreuer, Christoph. Principles of International Investment Law. Oxford University Press, 2012
[2] Metalclad Corporation v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award (Aug. 30, 2000)
[3] Award of 12 April 1977, 62 ILR 140 (1982)
[4] ICSID Case No. ARB(AF)/97/1, Award (30 August 2000), 5 ICSID Rep. 209 (2002).
[5] ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary, ICSID Case No. ARB/03/16, Award (2 October 2006), 15 ICSID Rep. 530 (2010)
[6] The International Law on Foreign Investment” – M. Sornarajah (Cambridge University Press)
[7] International Investment Arbitration: Substantive Principles