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CLAIMS AND DEFENSES I:
EXPROPRIATION
L8133: Columbia Law School
February 20, 2014
© 2014 – Borzu Sabahi, Kabir Duggal. This material may be freely copied and distributed with the prior written permission from the authors.
PART I
Introduction to the
Doctrine of Expropriation
1
Different Categories of Expropriation
Category
Explanation
Involves a governmental “take-over” in the traditional sense.
 Feldman v. Mexico: “governmental authorities take over a mine
or factory, depriving the investor of all meaningful benefits of
ownership and control.”
Direct

Indirect

E.g., gas station next
to highway. Highway
closed down.
Huge tax imposed.
Creeping/
Constructive
(form of indirect
expropriation)
Starett v. Iran: “It is recognized in international law that
measures taken by a state can interfere with property rights to
such an extent that these rights are rendered so useless that they
must be deemed to be have been expropriated, even though the
state does not purport to have expropriated them and the legal
title to the property remains with the original owner.”
A
series of acts or omissions that in sum result in a deprivation
of property rights.
 Generation Ukraine v. Ukraine: “Creeping expropriation is a
form of indirect expropriation … whereby a series of acts
attributable to the state over a period of time culminate in the
expropriatory taking of such property.”
2
Lawful v. Unlawful Expropriation
Expropriation
Lawful Expropriation
Unlawful
Expropriation
Meets conditions in the treaty:
-Public purpose
-Non discrimination
-Due Process
-Against Compensation
Does not meet
the conditions
in the treaty
3
Criteria to determine legality of Expropriation
1.
For Public Purpose

View 1: Should not second guess a state’s determination because
concept is broad (U.S. Third Restatement).
View 2: “[A] treaty requirement for ‘public interest’ requires some
genuine interest of the public. If mere reference to ‘public interest’
can magically put such interest into existence and therefore
satisfy this requirement, then this requirement would be rendered
meaningless.” (ADC v. Hungary).

2.
On a Non-Discriminatory Basis

“Discriminatory taking is one that singles out a particular person or
group of people without a reasonable basis.” (Rubins and
Kinsella).
E.g., Nazi policy against Jewish property or Idi Amin’s policy
against Ethnic Indians.

4
Criteria to determine legality of Expropriation
3.
According to Due Process


Should provide for the possibility to have the expropriation/amount
of compensation reviewed by an independent body (Reinisch).
“The measure must not only be supported by valid reasons, it
must also have been taken in accordance with a lawful
procedure.” (Goetz v. Burundi).
4.
On Payment of Compensation

Traditional rule “Hull Formula”: prompt/adequate/effective
payment. No longer regarded as CIL (Reinisch).
“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.” (CDSE v. Costa
Rica).
5

Consequences of the Legality of Expropriation
Rule established in the Chorzów Factory
Case (PCIJ): Germany v. Poland.


Particulars
Applicable treaty was 1922 Geneva
Convention between Poland and Germany.
Treaty expressly prohibited Poland from
expropriating property of German nationals
in Upper Silesia.

Poland acquired territory from Germany
after WW I; seized nitrate factory of
German nationals there.

Expropriation was “unlawful” because the
State had no right (per the 1922 treaty) to
expropriate the property in question.
6
Ruling in the Chorzów Factory Case
“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 . . .”
Consequences of Legality of Expropriation (CIL)
Question:
Do you apply
BIT standard
which does not
often make
such a
distinction on
compensation
or CIL
standard?
Unlawful
Expropriation
Lawful Expropriation
Compensation
as of date of the
taking
Increased
Damages
Possibility of
moving
valuation date
to date of award
7
CIL OR TREATY STANDARD?: CANADA MODEL BIT
Article 13: Expropriation
1.
Neither Party shall nationalize or expropriate a covered investment
either directly, or indirectly through measures having an effect equivalent
to nationalization or expropriation (hereinafter referred to as
“expropriation”), except for a public purpose, in accordance with due
process of law, in a non-discriminatory manner and on prompt, adequate
and effective compensation.
2.
Such compensation shall be equivalent to the fair market value of the
expropriated investment immediately before the expropriation took place
(“date of expropriation”), and shall not reflect any change in value
occurring because the intended expropriation had become known
earlier. Valuation criteria shall include going concern value, asset value
including declared tax value of tangible property, and other criteria, as
appropriate, to determine fair market value.
8
PART II
Special Issues
Relating to Indirect
Expropriation
9
Substantial Deprivation Test: Pope & Talbot Case
Canada’s export regulation in softwood lumber reduced Claimant’s profits—
alleged indirect expropriation.
Held: No indirect expropriation:
“While it may sometimes be uncertain whether a particular interference with
business activities amounts to an expropriation, the test is whether that
interference is sufficiently restrictive to support a conclusion that the
property has been ‘taken’ from the owner.”

“The Investor’s (and the Investment’s) Operations Controller testified at the
hearing that the Investor remains in control of the Investment, it directs the
day-to-day operations of the Investment, and no officers or employees of
the Investment have been detained by virtue of the Regime.”

“Canada does not supervise the work of the officers or employees of the
Investment, does not take any of the proceeds of company sales (apart
from taxation), does not interfere with management or shareholders’
activities, does not prevent the Investment from paying dividends to its
shareholders, does not interfere with the appointment of directors or
management and does not take any other actions ousting the Investor from
full ownership and control of the Investment.”
10
Effects v. Purpose/Context of Governmental Measure
i
“Sole Effects” Approach

Phelps Dodge Case: “The tribunal fully understands the reasons
why the Respondent felt compelled to protect its interests … but
those reasons and concerns cannot relieve the Respondent of the
obligation to compensate Phelps Dodge for its loss.”
ii
Intent is less important than the effect

Tippetts Case: “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.” (also in Tecmed v. Mexico).
iii.
State Intent will be considered

Saluka Case: “It is now established in international law that States
are not liable to pay compensation to foreign investor when, in the
normal exercise of their regulatory powers, they adopt in nondiscriminatory manner bona fide regulations that are aimed at the
general welfare.”
11
Indirect/Creeping Expropriation: Continuing Act
ILC Article 14(1): Act that is not of continuing character
“The breach of an international obligation by an act of a State not
having a continuing character occurs at the moment when the act is
performed, even if its effects continue.”
e.g., Pain & suffering after torture/economic effects of expropriation may continue. Here
act is not a continuing one (although consequences could be subject of secondary
obligations of reparation)—ILC Commentary.
ILC Article 14(2): Act of a continuing character
“The breach of an international obligation by an act of a State having a
continuing character extends over the entire period during which the act
continues and remains not in conformity with the international
obligation.”
e.g., The ICJ in The United States Diplomatic and Consular Staff in Tehran case referred
to “successive and still continuing breaches by Iran of its obligations to the United States
under the Vienna Conventions of 1961 and 1963.”
12
Creeping Expropriation: Composite Act
ILC Article 15(1): What is a Composite Act?
“The breach of an international obligation by a State through a series of
actions or omissions defined in aggregate as wrongful occurs when the
action or omission occurs which, taken with the other actions or
omissions, is sufficient to constitute the wrongful act.”
ILC Article 15(2): What is the relevant time period?
“[T]he breach extends over the entire period starting with the first of the
actions or omissions of the series and lasts for as long as these actions
or omissions are repeated and remain not in conformity with the
international obligation.” (e.g., Genocide).
(Relied in Siemens v. Argentina case: “Obviously, each step must have
an adverse effect but by itself may not be significant or considered an
illegal act. The last step in a creeping expropriation that tilts the balance
is similar to the straw that breaks the camel’s back. The preceding
straws may not have had a perceptible effect but are part of the
process that led to the break.”).
13
PART III
The Special Case
of Taxation
14
Basic Rules

Brownlie: “State measures, prima facie a lawful exercise of powers
of government, may affect foreign interests considerably without
amounting to expropriation. Thus foreign assets and their use may
be subjected to taxation, trade restrictions involving licenses and
quotas, or measures of devaluation. While special facts may alter
cases, in principle such measures are not unlawful and do not
constitute expropriation.”

Vivendi v. Argentina (Resubmission): “[A] distinction between only a
partial deprivation of value (not an expropriation) and a complete or
near complete deprivation of value (expropriation).”

Happ and Rubins: “Most tribunals seem to agree that expropriation
can only occur where diminution in value is very close to 100 per
cent.”
15
Archer Daniels v. Mexico
Mexico enacted a 20% tax on high fructose corn syrup (HFCS) that
claimant alleged indirectly destroyed the value of its investment.
Held: No expropriation:
 Operations: “The tax did not frustrate the complete operation of
ALMEX activities in Mexico. After the Tax entered into force, ALMEX
continued to produce and distribute its products derived from wet
milling of corn. Today, ALMEX continues to operate and has resumed
its production and distribution of HFCS in Mexico.”
 Deprivation: “no expropriation occurs unless the measure’s degree of
interference is substantial, which is not the case in the present
situation, where the Claimants remained at all times in control of their
investment, producing and distributing HFCS in Mexico. Accordingly,
the loss of benefits or expectation, or the alleged discriminatory
character of the Tax —standing alone— is not a sufficient criterion for
an expropriation.”
16
Paushok v. Mongolia
Mongolia enacted a 68% windfall profits tax on gold mining
activities. Claimant alleged expropriation under RussiaMongolia BIT.
Held: No expropriation:
 No change in the ownership or control (¶ 331).
 This was despite the fact that there was a very heavy
burden on Claimants (¶ 332).
 Did not result in a “destruction of an ongoing enterprise”
(¶ 334).
17
PART IV
State Defenses
18
Defenses Provided in the ILC Articles on State Responsibility

Circumstances precluding wrongfulness (A. 20-25)
Consent (A. 20)


Self defense (A. 21)


In accordance with Chapter II, Part III.
Force Majeure (A. 23)



In conformity with the UNC.
Counter Measures (A. 22)


The extent to which the act remains within scope of consent.
Irresistible force or unseen event: (i) beyond the control of state and
(ii) materially impossible to perform obligation.
Does not apply: (i) if due to conduct of state invoking it or (ii) state has
assumed risk.
Distress (A. 24)


No other reasonable way of saving author’s life or lives of other
persons entrusted in the author’s care.
Does not apply: (i) if due to conduct of state invoking it or (ii) act
create comparable or greater peril.
19
DEFENSE OF NECESSITY IN ILC ARTICLES
Article 25
Safeguard an essential interest against grave & imminent peril + Does
not impair an essential interest towards whom the obligation exists.
Cannot be invoked if:


international obligation in question excludes possibility of invoking
necessity; or
state has contributed to the situation of necessity.
In Impregilo v. Argentina, tribunal noted CIL standard would apply even
if not expressly provided for in the BIT:
“Article 4 [non discrimination clause] cannot be read so as to exclude
the application of customary international law to an emergency
situation. The Arbitral Tribunal therefore must evaluate Argentina’s
necessity plea under the standard set by customary international law,
which the Parties agree has been codified in Article 25 of the
International Law Commission’s Articles on Responsibility of States for
Internationally Wrongful Acts.”
20
APPLICATION TO THE ARGENTINE CASES
Often invoked as a defense by Argentina. Mixed results:

Most Argentine cases: Rejected (only total collapse would result
in necessity) e.g., Enron



Tribunal was not convinced that the crisis compromised the very
existence of the State and its independence so as to qualify as
involving an essential interest of the State.
There had been a substantial contribution of the State to the
situation of necessity.
Accepted: Continental Casualty (a legitimate aim).


The emergency situation at issue qualified in general under Art. XI
of the BIT. A severe economic crisis may qualify under Art. XI as
affecting an essential security interest but Art. XI is not self-judging.
The measures taken by Argentina contributed materially to the
realization of their legitimate aims.
Alternatives were not
reasonably available.
21
APPLICATION TO THE ARGENTINE CASES
Often invoked as a defense by Argentina. Mixed results:

Accepted for part of the period: LG&E.


Tribunal concluded that from December 1 2001 until April 26, 2003,
Argentina was in a period of crisis during which it was necessary to
enact measures to maintain public order and to protect its essential
security interests.
Two decisions annulled: Sempra and Enron (ignored BIT).


Tribunal wrongly found that Art. 25 “trumps” Art. XI of BIT in
providing the mandatory legal norm to be applied.
The ad hoc Committee held that the tribunal had failed to conduct
its review on the basis of the applicable legal norm to be found in
Art. XI of the US-Argentina BIT, and this failure constituted and
excess of powers.
22
PART V
Cases
23
ADC v. Hungary
Facts of the case





1998: Two Cypriot companies enter into a 12-year concession
agreement with the Hungarian Air Traffic and Airport Authority to
manage activities and modernize the Budapest International
airport.
2001: New government enacts decree which restricts activities
by Claimants on the grounds that the state had a “strategic
interest” in the activities.
2002: Government takes over all claimants operations and no
compensation had been received in connection with the
agreements.
2005: Government re-privatizes the airport, and eventually
awards a 75-year contract to a British company (worth US$ 2.26
billion).
Claimant initiated arbitration under Cyprus-Hungary BIT for
expropriation (alleged that the Decree was unexpected,
unjustified and uncompensated).
24
ADC v. Hungary
Judgment: Expropriation was unlawful

Not merely an exercise of State’s right to regulate its domestic
and economic affairs. No assumption of risk by investor
because reasonable expectation of fair treatment.

No public interest because requires some “genuine interest” of
the public (otherwise standard is meaningless).

Hungary did not substantiate/establish the methods of review for
the expropriation—therefore no due process.

Hungary discriminated against foreign investor (only claimant) in
comparison with Respondent-appointed operator.

“No compensation was provided” and tribunal “feels no need to
expand its discussion here.”

Because expropriation was deemed unlawful, tribunal awarded
benefit of subsequent increase in value. It moved the valuation
date to the date of the award (not date of taking).
25
Tokios Tokeles v. Ukraine
Claimant alleged that because it published materials for the opposition party, its
business was targeted and its investment was indirectly expropriated by the
government.
Held: No expropriation:
 Applied a substantial deprivation test:
Neither treaty or BIT has provided a “precise degree of deprivation that will qualify
as ‘substantial’.”
 “One can reasonably infer that a diminution of 5% of the investment’s value will not
be enough for a finding of expropriation, while a diminution of 95% would likely be
sufficient.”
 Determination will depend on particular facts before the tribunal.


Failure to meet Burden of Proof:
Not shown reputation/relationships damaged to point “that it was unable to obtain
any new orders.”
 Not shown police raids/investigations had “significantly impaired its ability to
operate.”
 It is conceivable that “such continuous hostile treatment as alleged by the Claimant”
could substantially deprive value of investment. But no such finding here.

26
Total v. Argentina
No indirect expropriation despite 86% reduction in value because of changes in
tariffs.
Held: No expropriation:
 “Total is in full control of its investment in TGN. Conversely, TGN operates
under the management of its shareholders and carries on its daily activities. It
is listed on the Buenos Aires Stock Exchange. The government’s decision in
2004 to establish a trust fund system in order to finance expansions of the
network by imposing surcharges on the tariffs paid by industrial users does not
entail either loss of control by Total over its investments nor TGN’s loss of
control over its business operations.”
 “Total has not shown that the negative economic negative impact of the
Measures has been such as to deprive its investment of all or substantially all
its value.”
 “The Tribunal further notes that damages under the heading of indirect
expropriation would not be different from damages due to breach of the fair and
equitable treatment standard. In no case could the Tribunal award double
recovery for the same damages to the same assets hypothetically caused by
the breach of two different BIT provisions.”
27
Occidental v. Ecuador
Claimant’s investment was allegedly expropriated though a
Caducidad Decree because it failed to get a prior necessary
approval for a transfer.
Held: Unlawful expropriation:
 “[T]he taking by the Respondent of the Claimant’s
investment by means of this administrative sanction was a
measure ‘tantamount to expropriation’ and thus in breach of
… the Treaty.” (also FET using a proportionality analysis).
 Caducidad Decree breached Ecuadorian and CIL.
 Tribunal agreed with Claimant that expropriation was
unlawful but the valuation was date of the Decree (i.e., did
not move valuation date).
 Claimant awarded USD. 1.8 billion.
28
PART VI
THINK ABOUT IT
29
Tough Areas

What if the parties cannot agree on compensation? Does this render
the expropriation unlawful?




Can you expropriate a part of the investment but not the entire
investment?



No: if good faith effort to arrive at compensation is made.
Yes: if treaty requires payment of compensation.
What if non-disputed amount is placed in an escrow account or paid?
Yes: you can expropriate a “discrete” right if it qualifies under the
definition of investment.
No: Investment must be viewed as a “whole.”
Can there ever be a lawful creeping expropriation?
No: Reisman and Sloane (“research reveals no international precedent
finding such an expropriation to have been lawful.”).
 Probably: if any of the exceptions apply.

30