One of the most common clauses in international investment agreements (“IIA”) relates to the prohibition against unlawful expropriation.1 There are two main classifications of expropriation: direct and indirect expropriation. As a sub-category of indirect expropriations, a creeping expropriation occurs when there is “incremental encroachment on one or more of the ownership rights of a foreign investor that eventually destroys (or nearly destroys) the value of its investment or deprives him or her of control over the investment. A series of separate State acts, usually taken within a limited time span, are then regarded as constituent parts of the unified treatment of the investor or investment.”2 Indeed, the decisive factor in classifying an indirect expropriation as a creeping expropriation is whether the expropriation results from a series of acts, each of which by itself is not sufficient to crystallize an expropriation.
In this Wiki Note, I will first distinguish a creeping expropriation from other types of expropriations. Then, I will categorize creeping expropriation as a composite-act breach and explain how this relates to ratione temporis jurisdiction. Finally, I will summarise the criteria given by various tribunals to distinguish legitimate regulatory acts from expropriation measures.
II. Situating a creeping expropriation within the wider taxonomy of expropriatory acts
Under international investment law, there are two main categories of expropriation: direct and indirect expropriation. Direct expropriation occurs where the State measure effects a transfer of formal legal title from the investor to another entity, typically to itself. It is the “forcible appropriation by the State of tangible or intangible property of individuals by means of administrative or legislative action.”3 It “usually involves a transfer of ownership to another person (frequently the government authority concerned), but that need not necessarily be so in certain cases ...”4
Indirect expropriation, by contrast, occurs where the State has not effected formal transfer of title in an investment, but has adopted measures having the effect of substantially depriving an investor of the value of its investment. As the NAFTA Tribunal in Glamis Gold v. United States noted, “such an expropriation does not occur through a formal action such as nationalization. Instead, in an indirect expropriation, some entitlements inherent in the property right are taken by the government or the public so as to render almost without value the rights remaining with the investor.”5
Substantial deprivation therefore can occur:
III. The composite act nature of the creeping expropriation breach and the ratione temporis jurisdiction of the tribunal
In contrast to a “single-act” breach, a creeping expropriation is a composite act.12 That is to say, a “breach of an international obligation by a State through a series of actions or omissions defined in aggregate as wrongful occurs.”13 This is a kind of “straw that breaks the camel’s back” breach, as the Siemens tribunal has recognized:14
"By definition, creeping expropriation refers to a process, to steps that eventually have the effect of an expropriation. If the process stops before it reaches that point, then expropriation would not occur. This does not necessarily mean that no adverse effects would have occurred. 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."
The composite act breach entails an interesting jurisdictional ratione temporis question insofar as “the 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.”15
If the expropriation fully takes place before the entry into force of the IIA, pursuant to the principle of non-retroactivity, there is no ratione temporis jurisdiction.16 Occasionally, however, one or several creeping expropriatory acts may have occurred before the entry into force of the IIA. The commentary to ARSIWA offers some guidance on this front: “[i]n cases where the relevant obligation did not exist at the beginning of the course of conduct but came into being thereafter, the ‘first’ of the actions or omissions of the series for the purposes of State responsibility will be the first occurring after the obligation came into existence.”17 However, the commentary also acknowledges that “[t]his need not prevent a court taking into account earlier actions or omissions for other purposes (e.g. in order to establish a factual basis for the later breaches or to provide evidence of intent).”18
Among tribunals, there is still debate on whether the composite act nature of the creeping expropriation allows the tribunal to take into account acts that have occurred before the entry into force of the treaty. Most investment tribunals analyzing composite act violations have declined to exercise jurisdiction in relation to acts that have occurred prior to the entry into force of an IIA.19 However, some tribunals have considered facts that had occurred prior to the entry into force of the treaty in the wider context of the breach.20 Among this latter set of cases, the Tecmed tribunal explicitly recognizes the importance of looking at facts which occurred prior to the IIA coming into force in the context of a composite breach. As the tribunal writes: “it should not necessarily follow from this that events or conduct prior to the entry into force of the Agreement are not relevant for the purpose of determining whether the Respondent violated the Agreement through conduct which took place or reached its consummation point after its entry into force. For this purpose, it will still be necessary to identify conduct – acts or omissions – of the Respondent after the entry into force of the Agreement constituting a violation thereof.”21
Finally, given the composite act nature of the creeping expropriation, the valuation date for this type of expropriations generally is the date when the first wrongful act or omission by the State occurred.22 See further Valuation date.
IV. Distinguishing between legitimate regulatory actions and creeping expropriations
The final interesting analysis for a creeping expropriation claim is that of distinguishing it from legitimate regulatory acts. Many of the acts taken by a State, which could be perceived by the investor as a creeping indirect expropriation, could actually be the result of the exercise of legitimate governmental police powers. The Feldman v. Mexico tribunal acknowledges this by stating:
“[t]he Tribunal notes that the ways in which governmental authorities may force a company out of business, or significantly reduce the economic benefits of its business, are many. In the past, confiscatory taxation, denial of access to infrastructure or necessary raw materials, imposition of unreasonable regulatory regimes, among others, have been considered to be expropriatory actions. At the same time, governments must be free to act in the broader public interest through protection of the environment, new or modified tax regimes, the granting or withdrawal of government subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and the like. Reasonable governmental regulation of this type cannot be achieved if any business that is adversely affected may seek compensation, and it is safe to say that customary international law recognizes this.”23
However, as the Feldman tribunal rightfully recognizes, only reasonable governmental regulation is allowed.24 Indeed, under customary international law, tribunals have required that police or regulatory powers by host States must be taken in good faith to protect the public welfare, on a non-discriminatory basis and be proportional to the ends sought. Not all tribunals, however, have required proportionality— some have referred to standards of non-arbitrariness25 or reasonableness.26 A legitimate exercise of a State’s police powers will not constitute an expropriation and thus compensation would not be owed.27
Creeping expropriations are a composite-act type of indirect expropriation forbidden by IIAs. Although it has been widely accepted as type of prohibited expropriation, requiring compensation, there are a dearth of cases which have actually found such a breach. Finally, good faith and non-discriminatory measures taken by the State generally will not constitute a creeping expropriation.
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