MINISTRY OF JUSTICE
HANOI LAW UNIVERSITY
FINAL EXAMINATION
SUBJECT: INTERNATIONAL INVESTMENT LAW
International investment law draws a distinction between direct
and indirect expropriation. Distinguish these types of
expropriatory act? On what basis could an arbitral tribunal
determine that a measure by the host state amounts to indirect
expropriation?
FULL NAME : NGUYỄN THU TRANG
ID NUMBER : 453536
SEMINAR CLASS : N03.TL2
Hanoi, 2023
TABLE OF CONTENT
INTRO .................................................................................................................. 3
CONTENT ........................................................................................................... 3
I. Distinguish between direct and indirect expropriation ...................... 3
II. What basis could an arbitral tribunal determine that a measure by
the host state amounts to indirect expropriation? ........................................ 5
CONCLUSION .................................................................................................... 7
INTRO
Expropriation is generally understood as a host state taking property belonging to
a foreign investor. Expropriation is not illegal per se but rather deemed an exercise of
the state's fundamental right of territorial sovereignty,while conditions of expropriation
are imposed by a variety of sources, including domestic laws, investment agreements
and customary international law.
CONTENT
I. Distinguish between direct and indirect expropriation
Depending on the kind of act adopted by the host state, expropriation can be
classified as direct or indirect expropriation. There are some different elements about 2
types of expropriatory act.
Firstly, about defination
Most IIAs do not explain the meaning of expropriation, whether direct or indirect,
while some new generation investment treaties change the situation by attempting to
provide a definition for expropriation. For instance, in its Annex B, the US–Uruguay
BIT defines 'direct expropriation' as 'where an investment is nationalised or otherwise
directly expropriated through formal transfer of title or outright seizure', with both
parties' recognition that the definition falls within their understanding of 'customary
international law'. The term 'formal transfer of title or outright seizure' is also adopted in
a series of investment agreements entered into by the European Union with other
countries.1
Besides, there are a range of words to describe indirect expropriation. To name a
few, “tantamount”, “de facto”, “creeping”, “disguised”, “equivalent” or “consequential”
expropriation. The terminology “tantamount to” may be found in Article 1110(1) of
NAFTA and in some BITs (see Article 4(2) of the 2001 Germany-Bosnia Herzegovina
BIT), while the expression “equivalent to” is used in Article 13(1) of the Energy Charter
Treaty (the “ECT”), as well as in BIT’s (see Article 5 of the 2000 UK-Sierra Leone
BIT2. In Tecmed v. Mexico, the arbitral tribunal attempted to explain these different
terminologies 3
“Generally, it is understood that the term “…equivalent to expropriation…” or
1
[Link] accessed on
19/11/2023.
2
C. McLachlan et al. “8. Expropriation” in International Investment Arbitration: Substantive Principles (2017),
para. 8.79.
3
Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, Award
dated 29 May 2003, para. 114.
“tantamount to expropriation” included in the Agreement and in other international
treaties related to the protection of foreign investors refers to the so-called “indirect
expropriation” or “creeping expropriation”, as well as to the above-mentioned de facto
expropriation. Although these forms of expropriation do not have a clear or unequivocal
definition, it is generally understood that they materialize through actions or conduct,
which do not explicitly express the purpose of depriving one of rights or assets, but
actually have that effect. This type of expropriation does not necessarily take place
gradually or stealthily — the term “creeping” refers only to a type of indirect
expropriation—and may be carried out through a single action, through a series of
actions in a short period of time or through simultaneous actions. Therefore, a
difference should be made between creeping expropriation and de facto expropriation,
although they are usually included within the broader concept of “indirect
expropriation” and although both expropriation methods may take place by means of a
broad number of actions that have to be examined on a case-by-case basis to conclude
if one of such expropriation methods has taken place”
Secondly, about formality
Expropriation could be direct where an investment is nationalised or directly
expropriated through the dispossession of the investor’s title over its investment. In an
international context, a direct expropriation occurs when the host state takes property
owned by a foreign investor located in the host state, when there is deprivation of wealth
attributable to the state. Direct expropriation is not very frequent in practice 4. The
traditional form of direct expropriation may be found in the context of the
nationalization of strategic sectors and industries, such as roads, parks, mines, and oil
fields. 5
However, expropriation could also be “indirect” through measures that, although
not formally denying the investor of its title, have an impact on the investor’s property
sufficient to effectively deprive the investor of benefits over its investments, inhibit its
management, use or control, or substantially depreciate its value. Indirect expropriation
can in turn take the form of regulatory expropriation - where a measure has been taken
for regulatory purposes but has an impact equivalent to expropriation, or creeping
expropriation - where it is not an individual act, but rather a series of measures that
brings about the expropriatory effect. 6Tribunals have found indirect expropriation in a
wide array of State measures, including (1) requisition of lands, (2) forced sales, (3)
exorbitant taxation, (4) deprivation of profits, (5) interference in the management of a
4
Textbook on International investment law, Chapter 5, p.140.
5
[Link] accessed on 19/11/2023.
6
Textbook on International investment law, Chapter 5, p.140.
business, (6) termination of rights, such as licences, contracts or debts, (7) blocking and
harassment of employees, (8) blockage of plants, and (9) prohibition on the repatriation
of profits.7
Third, about level of interference with property rights
If direct expropriation results in a change of ownership of the investment property,
causing the investor's tangible investment property to fall into the hands of another
person (the government) or be lost, the indirect expropriation only leads to loss of
operating and control rights, reducing the value of investment assets.
Finally, about compresation
It should be noted that in direct expropriation, the host State acquires an economic
gain. There is, indeed, a transfer of ownership over private property to the public, and
therefore an enrichment of the State. In such circumstances then, it is only right that the
State should pay for what it has taken. However, in indirect expropriation through a
general regulatory measure, the State does not normally make any financial profit out of
the measure in question. Instead, , it may even result in a loss of tax revenue due to the
closure of a business or decrease in the consumption of a product. The standard of full
compensation, therefore, becomes difficult to justify.8
The assessment of compensation by the host State (or, failing this, by an arbitral
tribunal) must be according to specific rules. BIT’s typically set forth specific
provisions on the standard of compensation, following a formula that requires “prompt,
adequate and effective” payment (the Hull formula). Adequate compensation is
typically stated in terms of (a) the “fair market value” of the investment, (b) assessed
immediately before the expropriation took place or became known (whichever is
earlier), plus (c) interest to the date of payment.
II. What basis could an arbitral tribunal determine that a
measure by the host state amounts to indirect expropriation?
First of all, a host state taking an expropriation measure is required to comply with
certain requirements or conditions contained in IIAs, which normally include the
following elements: (1) the measure was adopted for a public purpose or interest, (2) in
a non-discriminatory manner, (3) in accordance with due process of law and (4) against
the payment of compensation.
However, the determination of indirect expropriation very much depends on the
7
A. Newcombe and L. Paradell, “Chapter 7 Expropriation” in Law and Practice of Investment Treaties:
Standards of Treatment (2009), p. 328.
8
Suzy H. Nikièma, IISD Best Practices Series: Compensation for Expropriation, March 2013, p.5.
specific facts and circumstances of the case. Generally, there are three main criteria that
arbitrators are likely to consider in evaluating a measure as recently summarised in the
Burlington Resources v. Ecuador, Decision on Liability. This decision clarifies the
criteria to apply and notes that the following requirements must be met in order to find
an indirect expropriation 9:
(i) a substantial deprivation of the value of the whole investment (i.e., the degree of
interference with the property right (including interference with the investor’s
reasonable investment-backed expectations): Most international judgments
consider the severity of the economic impact caused by government action as an
important factor. At the same time, the interference must be substantial to
constitute a deprivation of rights. Several international courts have held that a
regulation may constitute expropriation when it significantly impairs the
economic rights of investors. Also, according to the Tecmed v. Mexico Award,
investors' legitimate expectations are relevant to assessing whether a measure is
expropriative or not.. It is a general principle of practical international law
(GPIL) so by definition it is a rather general and vague principle. Legitimate
expectations may be created from certain host country commitments (specific or
general). For example, specific contractual guarantees of non-increase in taxes
and royalties are a legitimate expectation (Revere Copper v. OPIC). However,
not every change in the host country's legal system that affects foreign assets
violates legitimate expectations (Methanex v. USA)
(ii) a permanent measure (i.e., the duration of the measure): Duration is also another
criterion for assessing whether the intervention has a significant effect on the
confiscated assets because the deprivation of ownership needs to be long enough
to affect FDI... The arbitrator will consider the nature of the foreign investment
project in relation to time
(iii) a measure not justified under the police power doctrine (which basically is
review of the measure’s purpose): Following the development in investor-state
dispute settlement, investment tribunals have come up with two doctrines when
considering whether a regulatory measure constitutes an indirect expropriation:
the sole-effects doctrine, which requires that reference be made only to the effect
of the measure on the property; and the police powers doctrine, which requires
global assessment of the measure's purpose, context and nature.64 Under the
latter doctrine, indicators of the expropriatory nature of a regulatory measure
may include lack of genuine public purpose, of due process, of proportionality,
9
Textbook on International investment law, Chapter 5, p.148.
and of fair and equitable treatment, discrimination, abuse of rights and direct
benefit to the state.10
CONCLUSION
Generally, expropriation (direct and indirect) also requires compensation, based
on clearly set rules of customary international law. However, while the determination of
a direct expropriation is relatively straightforward to make, determining whether a
measure falls into the category of indirect expropriation has required tribunals to
undertake a thorough case-by-case examination and carefully consider the specific
wording of the treat
10
[Link] accessed on
19/11/2023.
REFERENCES
1. Textbook on International investment law, Chapter 5.
2. C. McLachlan et al. “8. Expropriation” in International Investment Arbitration:
Substantive Principles, 2017.
3. Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID
Case No. ARB (AF)/00/2, Award dated 29 May 2003.
4. A. Newcombe and L. Paradell, “Chapter 7 Expropriation” in Law and Practice
of Investment Treaties: Standards of Treatment,2009.
5. Suzy H. Nikièma, IISD Best Practices Series: Compensation for Expropriation,
March 2013
6. [Link]
accessed on 19/11/2023.
7. [Link]
accessed on 19/11/2023.
8. [Link]
aiLieuDuAnMuTrap/TaiLieuHoiThao/5_%20Day%201%20Session%203%20E
xpropriation_Mr_%20Chaisse_V_Phuong.pdf, accessed on 19/11/2023.
