• Tutorial video

Author

Ms Isabel San Martin

Associate in International Arbitration - LALIVE

Editor

Dr Andrew Willcocks

Director of International Trade & Partnerships - Jus Mundi

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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

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.2

II. Treaty practice

3.

Expropriation is included in virtually all International Investment Agreements (“IIAs”),3 sometimes with different terms, i.e. “deprivation.”4 Tribunals tend to interpret the concept according to international law standards as it is mostly not defined in IIAs,5 and since the concept is considered as deriving from customary international law.6 

4.

Some investment treaties contain an express reference to arbitral tribunals’ jurisdiction to determine the amount of compensation.7 

III. Types of expropriation

5.

Expropriation can be direct or indirect.

A. Direct expropriation

6.

Direct expropriation consists of a mandatory legal transfer of the title to the property or its outright physical seizure.8 Direct expropriations have become rare.9

B. Indirect expropriation

7.

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 (alias “dispossession”),10 without the legal title being affected.11

8.

There are various forms of indirect expropriation, the most notable one being creeping expropriation,12 when the expropriation occurs gradually or in stages through measures that individually do not necessarily rise to the level of a taking.13 By contrast, a de facto expropriation occurs abruptly through a unique action.14 (See also Judicial expropriation).

9.

Most investment treaties contain provisions on indirect expropriation, equivalent measures, or measures with tantamount effect,15 or arbitral tribunals interpret them as broad enough to include protection against such measures.16

10.

Tribunals have found that the types of measures that can give rise to expropriation is very broad.17

11.

Regulatory measures can also lead to effects similar to indirect expropriation.18 Certain IIAs have included specific language to distinguish between expropriatory measures and regulatory measures in accordance with the police powers doctrine.19

IV. Different considerations exerted by arbitral tribunals when faced with an expropriation claim 

12.

The tribunal’s break-down of the different elements to shape an expropriation claim is instructive and based on the applicable provisions at stake. For instance, the tribunal in Fireman’s Fund v. Mexico summarized the elements to verify when an expropriation claim is brought under NAFTA.20

13.

In this section we discuss some elements identified by tribunals to determine whether an expropriation occurred, before turning to the elements of a lawful expropriation.

A. A materialized act by the State

14.

The host State must have undertaken an act jurii imperii.21 (See also Attribution)

15.

Some tribunals have concluded that the deprivation of property can be caused by actions or inactions,22 while others have considered that omissions by the host State are not sufficient.23

16.

When a claim is filed the expropriation should have occurred; otherwise, the claim may be considered as premature and lead to the tribunal’s lack of jurisdiction.24

17.

Tribunals will first determine whether an expropriation has taken place, before assessing whether it complied with the requirements for a lawful expropriation.25

B. A property right as the object of the expropriation

18.

The claimant should have ownership26 of a protected27 investment. Acquired rights can also be subject to expropriation.28 Municipal law may be relevant for this issue.29 Moreover, in assessing whether an expropriation has occurred, tribunals have often treated the investment “as a whole”.30

19.

Only property rights (which can be alienated or assigned), as opposed to personal rights, can be subject to expropriation.31

20.

Arbitral tribunals have recognized that both tangible and intangible rights can be expropriated32 (i.e. trademarks,33 access to the U.S. market under NAFTA34).

C. Expropriation of contractual rights

21.

Tribunals have included contractual rights within the scope of expropriatory objects.35 For example, the wrongful termination of an agreement or a breach of the agreement can amount to an expropriation. In those instances, tribunals have generally required that three cumulative conditions be met: (i) the investor should first sue the State counter-party in the appropriate forum to remedy the breach of contract;36 (ii) a preliminary determination of the existence of a contractual breach under domestic law is often required;37 and (iii) the breach must give rise to a “substantial decrease of the value of the investment.”38

22.

At least one tribunal has concluded that “pure contractual rights” cannot be expropriated or taken.39

23.

At least one tribunal has found that the right to formal negotiations cannot be subject to an expropriation.40

V. Requirements for a lawful expropriation

24.

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:41

  1. For a public purpose or interest;42
  2. In a non-discriminatory manner;43
  3. In accordance with due process;44 and
  4. Against the payment of compensation that is prompt, adequate and effective.45 
25.

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.46

VI. Damages

26.

The Chorzów Factory case provides the customary international law rules regarding the consequences of a lawful or unlawful expropriation.47 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).48 Conversely, when an unlawful expropriation takes place, the investor has the right to full reparation,49 which includes not only losses, but also loss of profits (lucrum cessans).50

27.

Reparation can be equal or exceed compensation, but never fall below it.51 Reparation would be higher than compensation when the loss is greater than the value of the expropriated investment.52 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.53

28.

Recourse to restitution as a means for reparation is unusual. Even though many tribunals have recognized their power to order restitution, they have also acknowledged the practical or legal impossibilities that may arise.54

VII. Expropriation and other ISDS concepts

29.

Tribunals have often discussed the interplay between expropriation and other protection standards. For example, tribunals have distinguished expropriatory measures from others that are “simply” discriminatory,55 unpredictable,56 or amount to an unfair treatment.57 (See further Discrimination in FET, Discriminatory measures and Stability in FET)

30.

Tribunals have also found that the frustration of an investor’s legitimate expectations does not necessarily amount to expropriation,58 although the frustration of those expectations may be taken into account as a relevant factor when assessing an indirect expropriation.59 Some tribunals have also taken into account the investor’s due diligence and the risky characteristics of an investment.60 (See also Risk)

Bibliography

Cox, J.M., Expropriation in Investment Treaty Arbitration, Oxford University Press, 2019.

Kinnear, M., Fischer, G.R., Mínguez Almeida, J., Torres, L. and Bidegain, M., Chapter 32: Police Powers or the State's Right to Regulate, in Building International Investment Law: The First 50 Years of ICSID, Kluwer Law International, 2015,

McLachlan, C. and Shore, L., Weiniger, M., International Arbitration: Substantive Principles, Oxford University Press, 2012

Nikièma, S.H., Compensation for Expropriation, Best Practices, International Institute for Sustainable Development, 2013.

Rajput, A., Chapter 2: the Concept of ‘Regulatory Measure’ and ‘Expropriatory Measure’, in Regulatory Freedom and Indirect Expropriation in Investment Arbitration, Kluwer Law International, 2018.

Schreuer, C., The Concept of Expropriation under the ECT and Other Investment Protection Treaties, Transnational Dispute Management, 2005.

Sicard-Mirabal, J. and Derains, Y., Introduction to Investor-State Arbitration, Kluwer Law International, 2018.

UNCTAD, Expropriation, UNCTAD Series on Issues in International Investment Agreements II, United Nation, New York and Geneva, 2012.

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