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Author

Mr David Khachvani

Senior Associate - Lévy Kaufmann-Kohler

Editor

Ms Anastasiya Ugale

International Lawyer - Solo International Law Practice

Direct Expropriation

I. Definition

1.

Direct expropriation is a State measure that removes the investor’s legal title to the investment and/or results in a permanent physical seizure of an investment. Investment treaties almost invariably prohibit direct expropriation except for a public purpose, on a non-discriminatory basis, with due process and against compensation for the value of the expropriated investment.

II. Object of expropriation

2.

While investment treaties predominantly refer to expropriation “of investments”, it is debated whether every type of asset that falls under the definition of investment is capable of being expropriated. The majority of tribunals and commentators consider that, so long as an asset constitutes an investment, it is capable of being expropriated.1 Others, who are in the minority, opine that only rights in rem, such as ownership, can be subject to expropriation, while rights in personam, such as contracts, cannot.2

III. Transfer of title to the State

3.

It is debated whether a direct expropriation necessarily implies a transfer of title to the State. While some tribunals consider that such transfer is required,3 others have held that direct expropriation also occurs when the title is annulled without being transferred (e.g. by way of a concession revocation).4

IV. Sovereign interference

4.

In order for a conduct to constitute an expropriation it must be taken in the State’s sovereign capacity. A mere repudiation of a contract, whether justified or not, does not amount to an expropriation, unless the State has resorted to its sovereign prerogative.5 See also Umbrella Clause.

V. Interaction with the police powers

5.

A deprivation of an investment that results from an exercise of the State’s police or regulatory powers, although not “immediate[ly] recogni[zed] in investment treaty decisions,” has in recent years been considered non-compensable in accordance with international law.6 Although the majority of the investment treaties contains no reference to the doctrine of police powers, investment treaty jurisprudence generally considers that bona fide, non-discriminatory measures, such as the legitimate execution of tax or criminal laws, or regulations adopted to protect the public order, human health or the environment do not constitute an expropriation.7

VI. Applicable law

6.

The definition of the term “expropriation”, as well as the scope of the non-expropriation obligation is determined under international law. In turn, the existence, validity and scope of the title to the asset subject to the alleged expropriation is a matter of municipal law.8 However, the relevant time for the assessment of the title is the time of the making of the investment.9 Any subsequent changes in the municipal rules governing the existence, validity and scope of the legal title may themselves be impugned as an expropriation, in which case, such measures would not form part of the assessment of whether the investor had a legal title to the allegedly expropriated investment.

VII. Relevant time

7.

Direct expropriation is considered to have taken place at the time of the transfer or annulment of the legal title.10 In cases of physical seizure of an investment, expropriation is considered to have taken place on the date of such seizure even if the permanent nature of the seizure became apparent only at a later stage. For this reason, the investor is generally entitled to be compensated for the value of the investment as of the date of the seizure or at any earlier date when the expropriation became public in cases of lawful expropriation.11

VIII. Compensation and lawfulness

8.

Tribunals have suggested that failure to pay compensation in and of itself is not sufficient to render an expropriation unlawful.12 Other tribunals have considered an expropriation unlawful because no compensation was paid.13 Some tribunals have suggested that the measure of compensation in instances of unlawful expropriation may not be different than that applied in lawful expropriation cases.14 Multiple tribunals have recognized, however, that a higher measure of compensation, including compensation based on ex post valuation, may be due in instances of unlawful expropriation.15 Some commentators opine that expropriation is unlawful whenever the State fails to meet any of the criteria of lawfulness contained in the applicable investment treaty, including the criterion of compensation. However, the amount and content of the compensation, as a modality of reparation, will depend on the nature and extent of the unlawfulness in a given case.16

Bibliography

OECD Working Paper on Indirect Expropriation and Right to Regulate.

Paulsson, ‘Indirect Expropriation: Is the Right to Regulare at Risk?’, Presentation at the Symposium Coorganized by ICSID, OECD and UNCTAD (2005).

Martins Paparinskis, ‘Regulatory Expropriation and Sustainable Development’, in M.W. Gehring, M.C. Cordonnier-Segger and A. Newcombe, eds., Sustainable Development in International Investment Law (Kluwer Law International)

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