Expropriation can 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
It must be noted that different standard of compensation applies to lawful and unlawful expropriation. Most of the 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.5 The state of necessity does not justify non-payment of compensation and non-payment of compensation alone can be enough to qualify the expropriation as unlawful.6
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.”7
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.
Bernardus Henricus Funnekotter and others v. Republic of Zimbabwe, ICSID Case No. ARB/05/6, Award, 22 April 2009, para. 106; Garcia v. Venezuela and Karina García Gruber v. Bolivarian Republic of Venezuela, PCA Case No. 2013-03, Final Award, 26 April 2019, para. 295; Bernardus Henricus Funnekotter and others v. Republic of Zimbabwe, ICSID Case No. ARB/05/6, Award, 22 April 2009, para. 107; 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.
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.
II. General treaty practice
A significant number of investment treaties adopt the standard of “prompt, adequate and effective” compensation.10 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).11 For some, the Hull formula refers to full compensation; that is to say, full compensation for losses suffered and lost profits. Typically, BITs adopting this standard do not make a distinction between lawful and unlawful expropriation.12
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.
III. "Prompt" compensation
Compensation is considered to be prompt if paid without delay.13 Tribunals have expressed prompt compensation in various ways. Terms such as “as quickly as possible,”14 “reasonable time”15 and “in due time”16 seem to be used synonymously with "prompt" compensation.17 Thus, the payment does not have to happen at the exact moment of expropriation, but the parties must engage in good faith negotiations on payment from the outset.18
Some investment treaties are more specific and provide the exact period of time within which the State must pay compensation.19 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."20
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 States21 but exceptional circumstances in which a State may not be able to compensate including “foreign exchange restrictions” must be taken into account.22
When an investment tribunal is faced with a request to determine whether there has been a treaty breach, it must take into account the time expended in the international proceedings for judging the promptness of compensation. This is so because the initiation of an international arbitration by the claimant does not absolve the respondent State from its primary obligation to provide prompt and adequate compensation.24
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.
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).
IV. "Adequate" compensation
“Adequate” compensation depends on whether expropriation is lawful or unlawful. See further Compensation for lawful expropriation. Adequate compensation corresponds to the market value of the investment.25 The exact method of valuation to use when calculating “adequate” compensation is provided for in some investment treaties.26 Other treaties require more generally that the compensation be valued “in accordance with generally recognized principles of valuation.”27
Those principles of valuation include full compensation or “restitutio in integrum”, which is calculated with the Hull formula28 of prompt, adequate, and effective compensation. It corresponds to the fair market value29 of the investment including when appropriate expected profits.30
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:
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.
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.
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).
V. "Effective" compensation
Lastly, compensation must be “effective,” meaning that the compensation must be payable, preferably in the currency of the investor’s nationality38 or in a freely convertible currency.39 A freely convertible currency is one that can be “immediately converted into other currencies on the foreign exchange market.”40
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.
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.
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.
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.