Expropriation be defined as a sovereign act carried out by a State in which it takes the property rights of a foreign investor.1 A majority of international investment agreements allow for expropriation as long as the investor is compensated for its loss.2 The word “compensation” is, in view of its derivation from the Latin verb compensare, properly defined as “counterbalance, rendering of an equivalent, requital, recompense.”3
Different standards of compensation may apply to lawful and unlawful expropriation. Most BITs "only stipulate the standard of compensation that is payable in the case of a lawful expropriation, and these cannot be used to determine the issue of damages payable in the case of an unlawful expropriation since this would be to conflate compensation for a lawful expropriation with damages for an unlawful expropriation."4
Where the BIT does not contain any lex specialis rules that govern the issue of the standard for assessing damages in the case of an unlawful expropriation, the tribunal would usually apply the default standard contained in customary international law of restitutio in integrum.5 Furthermore, the state of necessity does not justify non-payment of compensation.6 Non-payment of compensation alone can be enough to qualify the expropriation as unlawful,7 however some tribunals have held a more nuanced approach.8 See further Compensation for lawful expropriation, Sections II and III.
Although compensation is required for takings, there is no defined standard as to how this compensation should be accounted for. One option takes into consideration the “fair market value of the investment including expected profits” which can be translated to “prompt, adequate and effective compensation.” The other option is “appropriate compensation,” where the compensation is fact specific and can “range from full compensation to much less."9 See further Compensation for lawful expropriation, Section IV and Compensation standards.
Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. Argentine Republic, ICSID Case No. ARB/09/01, Award, 21 July 2017, para. 1033; Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 273; ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary, ICSID Case No. ARB/03/16, 2 October 2006, Award, para. 483.
Garcia v. Venezuela and Karina García Gruber v. Bolivarian Republic of Venezuela, PCA Case No. 2013-03, Final Award, 26 April 2019, para. 295; Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, para. 706; Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award, 07 February 2017, para. 165.
Westberg, J.A., Applicable Law, Expropriatory Takings and Compensation in Cases of Expropriation; ICSID and Iran-United States Claims Tribunal Case Law Compared, ICSID Review - Foreign Investment Law Journal, Vol. 8, Issue 1, 1993, pp. 1-28.
ADC Affiliate Limited and ADC & ADMC Management Limited v. Republic of Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006, paras. 481-485; Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 8.2.3; Biwater Gauff (Tanzania) Limited v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award, 24 July 2008, para. 775; Saipem S.p.A. v. People's Republic of Bangladesh, ICSID Case No. ARB/05/07, Award, 30 June 2009, para. 201; Quiborax S.A. and Non Metallic Minerals S.A. v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Dissenting Opinion of Brigitte Stern, 16 September 2015, paras. 14-19; Caratube International Oil Company LLP and Devincci Salah Hourani v. Republic of Kazakhstan, ICSID Case No. ARB/13/13, Award, 27 September 2017, para. 1082; Karkey Karadeniz Elektrik Uretim A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/13/1, Award, 22 August 2017, para. 662-664; UP (formerly Le Chèque Déjeuner) and C.D Holding Internationale v. Hungary, ICSID Case No. ARB/13/35, Award, 9 October 2018, paras. 511-512, 560.
Cox, J.M., Expropriation in Investment Treaty Arbitration, Oxford University Press, 2019.
Brownlie, I., Principles of Public International Law, 7th ed., Oxford: Oxford University Press, 2008.
NAFTA, Art. 1110.1.d; USMCA, Art. 14.8.1.c; Portugal-Qatar BIT (2009), Art. 6.1; China-Singapore BIT (1985), Art. 6.1; France-Lebanon BIT (1996), Art. 4.2; Germany-Korea BIT (1964), Art. 3(2); Colombia-UK BIT (2010), Art. VI.1; Brazil-India Investment Cooperation and Facilitation Agreement, 25 January 2020, Art. 6.1; Agreement between the Government of the Hong Kong Special Administrative Region of the People's Republic of China and the Government of the United Arab Emirates for the Promotion and Reciprocal Protection of Investments, 16 June 2019, Art. 6(1).
Mobil Cerro Negro Holding, Ltd., Mobil Cerro Negro, Ltd., Mobil Corporation and others v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award of the Tribunal, 09 October 2014, para. 301; ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, Award, 08 March 2019, paras. 219-220; Tidewater Investment SRL and Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award, 13 March 2015, para. 140.
A significant number of investment treaties12 and tribunals13 adopt the standard of “prompt, adequate and effective” compensation. This is the so-called Hull formula, meaning that the investor should be granted, as soon as the investment is made (prompt), an amount equal to the total value of its expropriated investment (adequate) in a freely transferable and exchangeable currency (effective).14 Typically, BITs adopting this standard do not make a distinction between lawful and unlawful expropriation.15
Denmark - Egypt BIT (1999), Adopted on 24 June 1999, Entered into force on 29 October 2000, Art. 5.1; Bangladesh - Denmark BIT (2009), Adopted on 5 November 2009, Entered into force on 27 February 2013, Art. 5.1; Latvia - United Kingdom BIT (1994), Adopted on 24 January 1994, Entered into force on 16 February 1995, Art. 5.1; Armenia - Latvia BIT (2005), Adopted on 7 October 2005, Entered into force on 21 April 2007 Art. 5.1.d; Bangladesh - Turkey BIT (2012), Adopted on 12 April 2012, Art. 6.1; Cuba - Denmark BIT (2001), Adopted on 19 February 2001, Art. 6.1; Korea, Republic of - Trinidad and Tobago BIT (2002), Adopted on 5 November 2002, Entered into force on 27 November 2003, Art. 5.1; Albania - Denmark BIT (1995), Adopted on 5 September 1995, Entered into force on 18 January 1996, Art. 5.1; Agreement between Japan and the Kingdom of Morocco for the Promotion and Protection of Investment, 08 January 2020, Art. 9.1; Agreement between the Government of the Republic of Singapore and the Government of the Republic of the Union of Myanmar on the Promotion and Protection of Investments, 24 September 2019, Arts. 6.1-6.2; Investment Protection Agreement between the European Union and its Member States, of the one part, and the Socialist Republic of Viet Nam of the other part, 30 June 2019, Art. 2.7.1; The Energy Charter Treaty, 17 December 1994, Art. 13.1; Jus Mundi search engine "Prompt, adequate and effective compensation" under International treaties.
AIG Capital Partners, Inc. and CJSC Tema Real Estate Company v. Republic of Kazakhstan, ICSID Case No. ARB/01/6 , Award, 07 October 2003, para. 12.1.3; CME Czech Republic B.V. v. The Czech Republic, Final Award, 14 March 2003, para. 497; Mobil Exploration and Development Inc. Suc. Argentina and Mobil Argentina S.A. v. Argentine Republic, ICSID Case No. ARB/04/16, Decision on Jurisdiction and Liability, 10 April 2013, para. 815; Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. Argentine Republic, ICSID Case No. ARB/09/1, Award, 21 July 2017, para. 1033; Enkev Beheer B.V. v. The Republic of Poland, PCA Case No. 2013-01, First Partial Award, 29 April 2014, para. 354; Standard Chartered Bank (Hong Kong) Limited v. United Republic of Tanzania, ICSID Case No. ARB/15/41, Award, 11 October 2019, para. 276; Olympic Entertainment Group AS v. Ukraine, PCA Case No. 2019-18, Award, 15 April 2021, para. 112; Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Annulment Proceeding, 5 February 2002, para. 91.
Compensation is considered to be prompt if paid without delay.16 Tribunals have expressed prompt compensation in various ways. Terms such as “as quickly as possible,”17 “reasonable time”18 and “in due time”19 seem to be used synonymously with "prompt" compensation.20 Thus, the payment does not have to happen at the exact moment of expropriation,21 but the parties must engage in good faith negotiations on payment from the outset.22
Some investment treaties are more specific and provide the exact period of time within which the State must pay compensation23 or at least fix the amount of compensation.24 The International Law Commission has observed that "the payment of the agreed compensation necessarily depends on the circumstances in each case and in particular on the expropriating State's resources and actual capacity to pay; even in the case of 'partial' compensation, very few States have in practice been in a sufficiently strong economic and financial position to be able to pay the agreed compensation immediately and in full."25
To this extent, the evaluation of “prompt” compensation is case specific and depends on the situation of each State. Three to six months may be normal for many States26 but exceptional circumstances in which a State may not be able to compensate including “foreign exchange restrictions” must be taken into account.27
Agreement between Japan and the Lao People's Democratic Republic for the Liberalisation, Promotion and Protection of Investment, 16 January 2008, entered into force 3 August 2008, Article 12(3); Austria - Saudi Arabia BIT (2001), Adopted on 30 June 2001, Entered into force on 25 July 2003, Article 4.2; Cuba - Qatar BIT (2001), Adopted on 6 November 2001, Article 3.2; Bangladesh - Turkey BIT (2012), Adopted on 12 April 2012, Article 6.3; Armenia - Latvia BIT (2005), Adopted on 7 October 2005, Entered into force on 21 April 2007, Article 5.2.a; Austria - Malta BIT (2002), Adopted on 29 May 2002, Entered into force on 1 March 2004, Article 5.2.a; Austria - Bosnia and Herzegovina BIT (2000), Adopted on 2 October 2000, Entered into force on 20 October 2002, Article 5.2.a; Armenia - Austria BIT (2001), Adopted on 17 October 2001, Entered into force on 1 February 2003, Article 5.2.a; Austria - Jordan BIT (2001), Adopted on 23 January 2001, Entered into force on 25 November 2001, Article 5.2.a; Bosnia and Herzegovina - Germany BIT (2001), Adopted on 18 October 2001, Entered into force on 11 November 2007, Article 4.2; Austria - Lebanon BIT (2001), Adopted on 26 May 2001, Entered into force on 30 September 2002, Article 5.2; Bank Melli Iran and Bank Saderat Iran v. The Kingdom of Bahrain, PCA Case No. 2017-25, Final Award, 9 November 2021, paras. 695-696.
However, this aspect of “good faith negotiations” has been challenged by Georges Abi-Sab in his dissenting opinion to this award.
ConocoPhillips v. Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and the Merits, 3 September 2013, para. 362; ConocoPhillips Petrozuata B.V., ConocoPhillips Hamaca B.V. and ConocoPhillips Gulf of Paria B.V. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/30, 3 September 2013, Decision on Jurisdiction and Merits, Dissenting Opinion of Georges Abi-Saab (Decision on Jurisdiction and Merits).
Croatia - Czech Republic BIT (1996), 5 March 1996, entered into force 1 February 1997, Article 4(2); Bulgaria - Croatia BIT (1996), Adopted on 25 June 1996, Entered into force on 20 February 1998, Article 4.2; Egypt - Macedonia, The former Yugoslav Republic of BIT (1999), Adopted on 22 November 1999, Article 4.2; Kuwait - Mauritius BIT (2013), Adopted on 18 April 2013, Entered into force on 24 July 2014, Article 1.5; Austria - Nigeria BIT (2013), Adopted on 8 April 2013, Article 1(5); United Nations Conference on Trade and Development (UNCTAD), Expropriation, UNCTAD Series on Issues in International Investment Agreements II, 2012.
United Nations Conference on Trade and Development (UNCTAD), Expropriation, UNCTAD Series on Issues in International Investment Agreements II, 2012, p. 49; Waguih Elie George Siag & Clorinda Vecchi v. Arab Republic of Egypt, ICSID Case No. ARB/05/15, Award, 1 June 2009, para. 435; South American Silver Limited (Bermuda) v. The Plurinational State of Bolivia, PCA Case No. 2013-15, Award, 22 November 2018, para. 599.
Adequate compensation corresponds to the market value of the investment.28 The exact method of valuation to use when calculating “adequate” compensation is provided for in some investment treaties.29 While defining what constitutes adequate compensation, treaties frequently make reference to an investment’s market value,30 just price,31 genuine value,32 or real economic value.33 Other treaties require more generally that the compensation be valued “in accordance with generally recognized principles of valuation."34
Those principles of valuation include full compensation or “restitutio in integrum”, which is calculated with the Hull formula35 of prompt, adequate, and effective compensation. It corresponds to the fair market value36 of the investment including expected profits when approprate.37 See further Compensation for lawful expropriation and Compensation standards.
Certain circumstances such as inflation of claims or the timing of the assessment must be taken into account when assessing the amount of compensation required.39 See further Valuation methods.
International efforts to establish valuation and timing standards has been underway for decades. The International Valuation Standards Council (IVSC) was formed in 1981 as the globalization of investments increased demand for professional valuation services of property interests. The goal of IVSC is to establish internationally accepted standards for reporting the value of property. Its standards cover:
World Bank, Guidelines on the Treatment of Foreign Direct Investment, 1992, p. 41, Guideline IV(3); United Nations Conference on Trade and Development (UNCTAD), Expropriation, UNCTAD Series on Issues in International Investment Agreements II, 2012; Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. Argentine Republic, ICSID Case No. ARB/09/1, Award, 21 July 2017, para. 1033; OOO Manolium Processing v. The Republic of Belarus, PCA Case No. 2018-06, Final Award, 22 June 2021, para. 615.
Agreement Between the Government of the People’s Republic of China and the Government of the Republic of Cote d’Ivoire on the Promotion and Protection of Investments, 30 September 2002 Article 4.2; Oman - Switzerland BIT (2004), 17 August 2004, entered into force 18 January 2005, Article 6(2); United Nations Conference on Trade and Development (UNCTAD), Expropriation, UNCTAD Series on Issues in International Investment Agreements II, 2012; Agreement between the Government of the Hong Kong Special Administrative Region of the People's Republic of China and the Government of the United Arab Emirates for the Promotion and Reciprocal Protection of Investments, 16 June 2019, Art. 6(1).
Kantor, M., Valuation for Arbitration: Uses and Limits of Income-Based Valuation Methods, Transnational Dispute Management (TDM 6), 2007:
“Investment treaties, courts and commercial codes in many countries routinely acknowledge that the proper measure of compensation for injury to business interests is the impact on the company’s market value.”
International Glossary of Business Valuation Terms, Fair market value; Teinver v. Argentina, ICSID Case No. ARB/09/1, Award, 21 July 2017, para. 1033; CME Czech Republic B.V. v. The Czech Republic, Final Award, 14 March 2003, para. 497; Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, para. 150; Saint-Gobain Performance Plastics Europe v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/13, Decision on Liability and the Principles of Quantum, 30 December 2016, para. 627; Tidewater Investment SRL and Tidewater Caribe, C.A. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award, 13 March 2015, para. 139; Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award, 08 December 2000, para. 118; OOO Manolium Processing v. The Republic of Belarus, PCA Case No. 2018-06, Final Award, 22 June 2021, para. 618.
Hyde, C.C., Compensation for Expropriations, American Journal of International Law, Vol. 33, Issue 1, 1939, pp. 108-112
AIG Capital Partners, Inc. and CJSC Tema Real Estate Company v. Republic of Kazakhstan, ICSID Case No. ARB/01/6, Award, 7 October 2003, para. 12.1.1; Chinen, M.A., The Standard of Compensation for Takings, Minnesota Journal of International Law, 2016.
ASEAN Comprehensive Investment Agreement, 26 February 2009, entered into force 24 February 2012, Article 14.2; Estonia - United States of America BIT (1994), Adopted on 19 April 1994, Entered into force on 16 February 1997, Article III.1; NAFTA, Adopted on 17 December 1992, Entered into force on 1 January 1994, Article 1110.1; Belarus - Slovenia BIT (2006), Adopted on 18 October 2006, Article 5.2; BLEU - Kosovo BIT (2010), Adopted on 9 March 2010, Article 7.3; Bulgaria - Finland BIT (1997), Adopted on 3 October 1997, Entered into force on 16 April 1999, Art. 5.2; OOO Manolium Processing v. The Republic of Belarus, PCA Case No. 2018-06, Final Award, 22 June 2021, paras. 615-618.
Netherlands - Oman BIT (2009), 17 January 2009, Article 4(c); Netherlands - Zimbabwe BIT (1996), Adopted on 11 December 1996, Entered into force on 1 May 1998, Article 6.c; Bolivia - Netherlands BIT (1992), Adopted on 10 March 1992, Entered into force on 1 November 1994, Article 6.c; Colombia - Peru BIT (2007), Article 11.2; BLEU (Belgium-Luxembourg Economic Union) - Mexico BIT (1998), Adopted on 27 August 1998, Entered into force on 18 March 2003, Article 5.3.
Free Trade Agreement between Australia and Thailand, 5 July 2004, entered into force 1 January 2005, Article 912.2; Chile - Philippines BIT (1995), 20 November 1995, entered into force 6 August 1997, Art. 6(2); Chile - South Africa BIT (1998), 12 November 1998, Art. VI(2); United Nations Conference on Trade and Development (UNCTAD), Expropriation, UNCTAD Series on Issues in International Investment Agreements II, 2012.
Pan, J., Valuation Standards for Calculating ICSID Awards, Pepperdine Dispute Resolution Law Journal, Vol. 14, Issue 3, 2014, pp. 355-374; CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, Award, 12 May 2005, paras. 403, 413-415; Dawson, F.G. and Weston B.H., Prompt, Adequate and Effective: A Universal Standard of Compensation?, Fordham Law Review, Vol. 30, Issue 4, 1961, p. 727.
United Nations Conference on Trade and Development (UNCTAD), Expropriation, UNCTAD Series on Issues in International Investment Agreements II, 2012; North American Free Trade Agreement, 17 December 1992, entered into force 1 January 1994, Article 1110(2); Korea-Mexico BIT (2000), Art. 5(2); Canada-Peru BIT (2006), Art. 13.2; Canada-Uruguay BIT (1997), Art. VIII.1; ECOWAS Supplementary Act on Investments, Art. 8(2); Investment Agreement between Australia and Hong Kong (2019), Art. 10.2(b); Investment Protection Agreement between the European Union and its Member States, of the one part, and the Socialist Republic of Viet Nam of the other part, 30 June 2019, Art. 2.7.2; Brazil-India Investment Cooperation and Facilitation Agreement, 25 January 2020, Art. 6.2.b-6.2.c.
Lastly, compensation must be “effective,” meaning that the compensation must be payable, preferably in the currency of the investor’s nationality41 or in a freely convertible currency.42 A freely convertible currency is one that can be “immediately converted into other currencies on the foreign exchange market.”43
Ethiopia - Spain BIT (2009), 17 March 2009, Article 5.3; Canada - Poland BIT (1990), Adopted on 6 April 1990, Entered into force on 22 November 1990, Article 6; Costa Rica - Spain BIT (1997), Adopted on 8 July 1997, Entered into force on 9 June 1999, Article 5.3; Poland - Thailand BIT (1992), Adopted on 18 December 1992, Entered into force on 10 August 1993, Article 6.1; United Nations Conference on Trade and Development (UNCTAD), Expropriation, UNCTAD Series on Issues in International Investment Agreements II, 2012; Investment Protection Agreement between the European Union and its Member States, of the one part, and the Socialist Republic of Viet Nam of the other part, 30 June 2019, Art. 2.7.2; Antoine Biloune and Marine Drive Complex Ltd. v. Ghana Investments Centre and the Government of Ghana, Award on Damages and Costs, 30 July 1990, para. 100; Casinos Austria International GmbH and Casinos Austria Aktiengesellschaft v. Argentine Republic, ICSID Case No. ARB/14/32, Award, 5 November 2021, para. 318.
Agreement Between the Government of Australia and the Government of the Arab Republic of Egypt on the Promotion and Protection of Investments, 3 May 2001, entered into force 5 September 2002, Article 7.3; Economic Partnership Agreement between Japan and Philippines, 9 September 2006, entered into force 11 December 2008, Article 95(3); United Nations Conference on Trade and Development (UNCTAD), Expropriation, UNCTAD Series on Issues in International Investment Agreements II, 2012.
Chinen, M.A., The Standard of Compensation for Takings, Minn. J. Int'l L. 25, 2016, p. 335.
Westberg, J.A., Applicable Law, Expropriatory Takings and Compensation in Cases of Expropriation; ICSID and Iran-United States Claims Tribunal Case Law Compared, ICSID Review, Vol. 8, Issue 1, 1993, pp. 1-28.
Fischer, J.M. Understanding remedies, LexisNexis, 2010.
Garcia, A., Fourth Report on International Responsibility, U.N. Doc. No. A/CN.4/119, 1959, para. 56.
Hyde, C.C., Compensation for Expropriations, American Journal of International Law, Vol. 33, Issue 1, 1939, pp. 108-112.
Kantor, M., Valuation for Arbitration: Uses and Limits of Income-Based Valuation Methods, Transnational Dispute Management (TDM) 4.6, 2007.
Dawson, F.G. and Weston B.H., Prompt, Adequate and Effective: A Universal Standard of Compensation?, Fordham Law Review, Vol. 30, Issue 4, 1961, p. 727.
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