Direct and indirect expropriation

Transcription

1 Direct and indirect expropriation Prof. Markus Krajewski University of Erlangen-Nürnberg Investment policies towards sustainable development and inclusive growth December 2013, Rabat, Morocco

2 Outline I. General principles II. Expropriation in international investment agreements 1. Examples of expropriation clauses 2. Types of expropriation 3. Challenges of the notion of indirect expropriation 4. Conditions of a legal expropriation 5. Compensation as remedy III. Problems with current approach and reforms Direct and indirect expropriation 2

3 I. General principles National sovereignty over natural resources Fundamental principle of public international law Recognised in UNGA Resolution 1803 (XVII), Permanent Sovereignty over Natural Resources (1962) Article 2 UNGA Resolution 3281 (XXIX), Charter of Economic Rights and Duties of States (1974) Art. 1 International Covenant on Economic, Social and Cultural Rights (1966) Art. 18 Energy Charter (1994) ICJ, Armed Activities in Congo (DRC / Uganda), 2005 Direct and indirect expropriation 3

4 Protection of individual property Customary international law Human right to property Art. 17 Universal Declaration of Human Rights Art. 14 African Charter on Human and Peoples' Rights Art. 31 Arab Charter on Human Rights Private property may be expropriated, but only for legitimate reasons and against some form of compensation Tension between public policies and property protection Völkerrecht I (6) 4

5 Rising importance of further principles Right to regulate economic and social affairs exercise of state sovereignty fulfilment of human rights obligations Standards of good governance Proportionality Impartiality Non-discrimination Transparency Tension between regulation and protection of individual rights Völkerrecht I (6) 5

6 II. Expropriation in international investment agreements Almost all IIAs contain expropriation protection clauses General regulatory structure reflects standards of public international law expropriation is not prohibited but subject of conditions and consequences of expropriation Open and contested questions What is expropriation? Which are the conditions and consequences of expropriation? Direct and indirect expropriation 6

7 1. Examples of expropriation clauses Article 5 BIT Finland-Nigeria (2005) (1) Investments by investors of a Contracting Party in the territory of the other Contracting Party shall not be expropriated, nationalised or subjected to any other measures, direct or indirect, having an effect equivalent to expropriation or nationalisation (hereinafter referred to as "expropriation"), except for a purpose which is in the public interest, on a non-discriminatory basis, in accordance with due process of law, and against prompt, adequate and effective compensation. Völkerrecht I (6) 7

8 (2) Such compensation shall amount to the value of the expropriated investment at the time immediately before the expropriation or before the impending expropriation became public knowledge, whichever is the earlier. The value shall be determined in accordance with generally accepted principles of valuation, taking into account, inter alia, the capital invested, replacement value, appreciation, current returns, the projected flow of future returns, goodwill and other relevant factors. (3) Compensation shall include interest at the commercial rate established on market basis for the currency of payment from the date of dispossession of the expropriated property until the date of payment and shall be paid and made transferable without delay to the country designated by the claimant concerned and in any freely convertible currency accepted by the claimant. Völkerrecht I (6) 8

9 Article 5 (2) BIT Germany-Lebanon (1997) Neither of the Contracting Parties shall take, either directly or indirectly, measures of expropriation, nationalization or any other measures having the same nature or the same effect against investments of investors of the other Contracting Party, unless the measures are taken in the public benefit, on a non-discriminatory basis, and under due process of law, and provided that provisions be made for effective and adequate compensation. Völkerrecht I (6) 9

10 Such compensation shall be equivalent to the value of the expropriated investment immediately before the date on which the actual or threatened expropriation, nationalization or comparable measure has become publicly known. The compensation shall be paid without delay and shall carry the usual bank interest until the time of payment; it shall be effectively realizable and freely transferable. Provisions shall have been made in an appropriate manner at or prior to the time of expropriation, nationalization or comparable measure for the determination and payment of such compensation. The legality of any such expropriation, nationalization or comparable measure and the amount of compensation shall be subject to review by due process of law. Völkerrecht I (6) 10

11 Art. III (1) BIT US-Egypt (1986) No investment or any part of an investment of a national or company of either Party shall be expropriated or nationalized by the other Party or by -a subdivision thereof-or subjected to any other measure, direct or indirect, if the effect of such other measure, or a series of such other measures, would be tantamount to expropriation or nationalization (.hereinafter referred to as "expropriation") - unless the expropriation (a) is done for a public purpose; (b) is accomplished under due process of law; (c) is not discriminatory; (d) is accompanied by prompt and adequate compensation, freely realizable; and (e) does not violate any specific contractual engagement. Völkerrecht I (6) 11

12 Compensation shall be equivalent to the fair market value of the expropriated investment on the date of expropriation. The calculation of such compensation shall not reflect any reduction in such fair market value due to either prior public notice or announcement of the expropriatory action, or the occurrence of the events that constituted or resulted in the expropriatory action. Such compensation shall include payments for delay as may be considered appropriate under international law, and shall be freely transferable at the prevailing rate of exchange for current transactions on the date of the expropriatory action. Völkerrecht I (6) 12

13 2. Types of expropriation Regarding scope Nationalisation: Industry- or sector-wide taking of property associated with transfer to state Expropriation: Taking of specific property or asset transferred to state or other economic actors Regarding formal effects direct expropriation: Forced and formal transfer of legal title and/or physical seizure of property indirect expropriation: deprivation of investment without formal transfer of title or physical dispossession Völkerrecht I (6) 13

14 Direct expropriation Historical development Key issue of investment protection in 19 th /20 th century Diminished practical importance since 1980s Today: New expropriations as reaction to financial and banking crises or in context of re-nationalisation of key natural resources Assessment Requirement of compensation for direct taking of property generally accepted standard of international law reflects principles of good governance and rule of law normally not an undue restriction of governmental regulatory power or discretion But: Restriction on sovereignty over natural resources Direct and indirect expropriation 14

15 Indirect expropriation Historical development accepted in some early 20 th century cases as part of customary international law practical relevance rose in 1990s indirect expropriation included in most BITs Today: Next to fair and equitable treatment and national treatment violations most common claim in investor-state dispute settlement cases Assessment contours and relationship with regulatory autonomy remain unclear may have regulatory chill effect Direct and indirect expropriation 15

16 3. Challenges of the notion of indirect expropriation Objective: Protection against governmental measures which have the same / similar effect than direct expropriation without constituting a direct expropriation But: What is the effect of an expropriation? What is equivalent? Terminological variety indirect, de facto, factual expropriation disguised expropriation measures tantamount / equivalent to expropriation Meaning usually interchangeable Völkerrecht I (6) 16

17 Special forms of indirect expropriation Creeping expropriation: series of activities which constitute expropriation only if considered together slow and incremental encroachment of ownership rights series of acts which culminate in expropriation Regulatory taking indirect expropriation based on regulatory measures (health, safety, environmental law, planning requirements, cultural policies etc.) but not bona fide regulation based on legitimate purposes Where to draw the line? Interference with contractual rights only if based on official authority not normal non-fulfilment of obligations Direct and indirect expropriation 17

18 Examples of indirect expropriation excessive, i.e. confiscatory or arbitrary taxation denial or revocation of operating licenses interference with management arrest and deportation of foreign managers imposition of new government-appointed managers refusal of access to raw material and infrastructure lack of due process, transparency, discrimination and interference with legitimacy expectations may indicate expropriation (potential overlap with fair and equitable treatment) Völkerrecht I (6) 18

19 Typical elements of indirect expropriation interference with property / protected investments or rights by measure or series of measures of a public authority to the extent that value of investment is significantly reduced / control over property is significantly decreased without formal change of legal title or physical dispossession Two key aspects of indirect expropriation no formal dispossession or transfer of title (mater of formality) significant interference with value of investment (matter of degree / intensity) Disputed: Relevance of governmental intention or objective ( Sole effects doctrine) Völkerrecht I (6) 19

20 Problem of the continuum formal change of legal title = direct expropriation significant reduction of value = indirect expropriation normal reduction of value = bona fide regulation, no expropriation increasing level of interference compensation no compensation Völkerrecht I (6) 20

21 Reducing ambiguity and breath of indirect expropriation Conditions which are presumed to lead to indirect expropriation Discriminatory measures Breach of state s binding commitments Unjustifiable arbitrariness Measures which are presumed to be bona fide regulation Reasonable measures taken in exercise of state powers to protect public policy goals (social, environmental etc. concerns) Specification of how to determine indirect expropriation Requirement of fact-based step-by-step analysis Considering economic impact Character or purpose of government action Völkerrecht I (6) 21

22 Clarifying the continuum formal change of legal title = direct expropriation Discrimination Breach of commitments arbitrariness = indirect expropriation Step-bystep consider various factors = (no) indirect expropriation Reasonable measures to protect public policy goals = no indirect expropriation increasing level of interference compensation no compensation Völkerrecht I (6) 22

23 4. Conditions of a legal expropriation Legal structure Expropriation not prohibited (unlike discriminatory treatment or violation of FET) but subject to conditions Typical conditions of legal expropriation in IIAs non-discriminatory basis for a public purpose due process of law compensation judicial review of decision Völkerrecht I (6) 23

24 5. Compensation as legal remedy Standards in IIAs prompt = without undue delay adequate = market value of the investment expropriated immediately before expropriation effective/freely realizable = in freely convertible currency including interests judicial review of decision and calculation of compensation = Hull formula Direct and indirect expropriation 24

25 Calculation of compensation But involves highly complex factual considerations typical method is discounted cash method which looks at projected income not replacement value How to reflect effects of regulation on value of investment? Example: Implementation of strict environmental policy leads to normal reduction of investment value no compensation significant reduction of investment value (= indirect expropriation) full compensation Direct and indirect expropriation 25

26 Other standards for compensation Appropriate compensation (e.g. Art. 2 Charter of Economic Rights and Duties of States) taking into account its relevant laws and regulations and all circumstances that the State considers pertinent in case of controversy: settlement under the domestic law of the nationalizing State and by its tribunals Equitable compensation (e.g. new South African Expropriation Bill 2013) Striking balance between private and public interest Market value predominant factor But also current use, extend of state investment and purpose of expropriation Völkerrecht I (6) 26

27 III. Problems with current approach and reforms Problems Unclear definition of indirect expropriation in treaty language and arbitration practice may negatively affect regulatory autonomy Legal remedy (full compensation) does not correspond to nature of continuum Remedies Defining indirect expropriation / distinguishing from regulatory measures Limiting amount of compensation Völkerrecht I (6) 27

28 Textual proposals from UNCTAD s IPFSD Textual proposal Provide that an expropriation must comply with/respect four conditions: public purpose, nondiscrimination, due process and payment of compensation Explanation IIAs with expropriation clauses do not take away States right to expropriate property, but protect investors against arbitrary or uncompensated expropriations, contributing to a stable and predictable legal framework, conducive to foreign investment. Völkerrecht I (6) 28

29 4.5.1 Limit protection in case of indirect expropriation (regulatory taking) by - establishing criteria that need to be met for indirect expropriation to be found - defining in general terms what measures do not constitute indirect expropriation (nondiscriminatory good faith regulations relating to public health and safety, protection of the environment, etc.) - clarifying that certain specific measures do not constitute an indirect expropriation (e.g.compulsory licensing in compliance with WTO rules). To avoid undue constraints on a State s prerogative to regulate in the public interest, an IIA may set out general criteria for State acts that may (or may not) be considered an indirect expropriation. While this does not exclude liability risks altogether, it allows for better balancing of investor and State interests. Völkerrecht I (6) 29

30 4.5.2 Specify the compensation to be paid in case of lawful expropriation: - appropriate, just or equitable compensation - prompt, adequate and effective compensation, i.e. full market value of the investment ( Hull formula ) Clarify that only expropriations violating any of the three substantive conditions (public purpose, nondiscrimination, due process), entail full reparation. The standard of compensation for lawful expropriation is another important aspect. The use of terms such as appropriate, just or fair in relation to compensation gives room for flexibility in the calculation of compensation. States may find it beneficial to provide further guidance to arbitrators on how to calculate compensation and clarify what factors should be taken into account. Völkerrecht I (6) 30

31 Questions and answers Thank you very much for your attention! Contact: