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Author

Ms Isabel San Martin

Associate in International Arbitration - King & Spalding

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Expropriation

I. Definition

1.

Expropriation is the taking of property belonging to a foreign investor by the State, which, if unlawful, triggers the international responsibility of the State.1 Expropriation is included in virtually all International Investment Agreements (“IIAs”).2

2.

Nationalization is a form of expropriation, but generally covers an entire industry or geographic region and typically occurs in the context of a major social, political or economic change.3

II. Types of expropriation

3.

Expropriation can be direct or indirect:

  1. Direct expropriation consists of a mandatory legal transfer of the title to the property or its outright physical seizure.4 Direct expropriations have become rare.5 
  2. indirect expropriation occurs when the property is otherwise destroyed or the owner is deprived of its ability to manage, use or control its property in a meaningful way,6 without the legal title being affected.7 (See also Sole effects doctrine). There are various forms of indirect expropriation, the most notable one being creeping expropriation,8 when the expropriation occurs gradually or in stages through measures that individually do not necessarily rise to the level of a taking.9 (See also Judicial expropriation).

Most investment treaties contain provisions on in Direct expropriation, equivalent measures, or measures with tantamount effect.10 Tribunals have found that the types of measures that can give rise to expropriation is very broad.11 

4.

Regulatory measures can also lead to effects similar to indirect expropriation.12 Certain IIAs have included specific language to distinguish between expropriatory measures and Regulatory measures in accordance with the police powers doctrine.13

III. Requirements for a lawful expropriation

5.

Expropriation is not illegal per se under international law. Under most IIAs, an expropriation will be deemed lawful if it fulfils all of the following criteria:14

  1. For a public purpose or interest;15
  2. In a non-discriminatory manner;16
  3. In accordance with due process;17 and
  4. Against the payment of compensation that is prompt, adequate and effective.18 
6.

According to the doctrine of police powers, States are not liable to pay compensation when, in the normal exercise of their regulatory power, they adopt non-discriminatory, bona fide regulations that are aimed at the general welfare, such as public health or safety.19

IV. Damages

7.

The Chorzów Factory case provides the customary international law rules regarding the consequences of a lawful or unlawful expropriation.20 In the case of a lawful expropriation, the investor is entitled only to compensation equating to the losses suffered upon the date of expropriation (damnum emergens).21 Conversely, when an unlawful expropriation takes place, the investor has the right to full reparation,22 which includes not only losses, but also loss of profits (lucrum cessans).23

8.

Reparation can be equal or exceed compensation, but never fall below it.24 Reparation would be higher than compensation when the loss is greater than the value of the expropriated investment.25 Although the value of the investment remains the same irrespective of the legality or illegality of the expropriation, Reparation may include elements additional to the investment’s value in order to re-establish the situation that would have prevailed had the illicit act not occurred.26

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