Nationalisation or measure tantamount to expropriation

Expropriation has been defined as including “not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.”¹ 

A State will not be liable for any claim of expropriation if it adopts a measure as a result of the "valid",² "legitimate",³ or "normal"⁴ exercise of its police power.⁵ See further Police powers doctrine, State regulatory power and Public interest.

Deprivatory takings within the police power of a State are unlikely to fall within the definition of an expropriation.⁶ 

Police power regulation is typically linked to public order and morality, protection of health⁷ and the environment and State taxation.⁸ Whether or not a State is found to have validly exercised its police power will also depend significantly on whether the measure was taken in good faith.⁹ Some tribunals also include an analysis of the proportionality or reasonableness of the measure taken.¹⁰ 

A measure of expropriation is considered lawful when the following requirements are met, namely:

1. that the measure serves a public purpose;¹¹
2. the measure is not arbitrary and discriminatory;¹² 
3. the process to adopt the measure follows due process;¹³ and
4. the measure is accompanied by prompt, adequate and effective compensation.¹⁴

These requirements must be satisfied cumulatively.¹⁵ 

A formal decree taking specific property,¹⁶ passing of a law nationalizing an industry¹⁷ and the seizure by the army of a company’s assets¹⁸ are examples of direct expropriation. In these cases, therefore, the State takes over the title of the property for its own use or transfers it to a third party.¹⁹ 

A review of the jurisprudence suggests that outright nationalisations are increasingly rare. When they do occur, the dispute tends to be over whether the expropriation was lawful (as opposed to the existence of an expropriation).²⁰

In cases involving indirect expropriation, there is no formal transfer of title or outright seizure, but the effect of the State’s actions is equivalent to direct expropriation, and is the “key question” in order to determine whether an indirect expropriation has taken place.²¹

Measures implemented by a host State must result in a substantial deprivation of control over an investment or a substantial diminution of its value.²² Tribunals have recognized that a State could take a wide spectrum of measures in asserting control over property.²³ The measure must be "equivalent" or "tantamount" to expropriation.²⁴ To determine whether a measure is equivalent or tantamount to expropriation, tribunals have generally found that the State's intent is not decisive,²⁵ despite being relevant.²⁶ 

Most IIAs protect against both direct and indirect expropriations.²⁷ Most Asia-Pacific Economic Cooperation (APEC) IIAs in particular explicitly address indirect expropriation.²⁸ 

Recent FTAs include detailed language specifying what tribunals should/must focus on when determining if the measures at issue constitute indirect expropriation.²⁹ There is an increasing reference to how a finding of indirect expropriation would only be justified in rare circumstances. These provisions generally provide that “[e]xcept in rare circumstances”, nondiscriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations. Some of these provisions generally provide that a determination of indirect expropriation requires a case-by-case, fact based inquiry that considers, inter alia, the economic impact of the government action, the extent to which the government action interferes with distinct, reasonable investment-backed expectations and the character of the government action.

According to the text of the “rare circumstances” exception, an action is not expropriatory and a State does not have to compensate, except where the measure is so disproportionate and severe in light of its purpose,³⁰ suggesting that a claimant must satisfy a high threshold before nondiscriminatory regulatory actions are found to be expropriatory.^31 32

Brownlie, I., Principles of Public International Law, 7^th ed., Oxford: Oxford University Press, 2008. 

Rajput, A., Regulatory Freedom and Indirect Expropriation in Investment Arbitration, Kluwer Law International, 2018. 

Newcombe, A. and Paradell, L., Law and Practice of Investment Treaties, Standards of Treatment, Kluwer Law International, 2004.

Vicuna, F.O. and Calvo, C., Honorary NAFTA Citizen, 11 N.Y.U. Environmental Law Journal 19, 2002-2003.

Miles, K. (ed.), Research Handbook on environment and investment law, Edward Elgar Publishing Limited, 2019. 

Vandenbroucke, F., Barnard, C. and De Baere, G. (eds.), A European Social Union after the Crisis, Cambridge University Press, 2017.