Expropriation in International Investment Law - Assignment Example

Topic: Expropriation in international investment law Introduction There exists a rule in international law that foreigners’ property cannot be taken for public or otherwise any purpose without providing compensation. Two decades back, academic circles and the courts faced disputes regarding the parameters of compensation and how to assess the expropriated value. There was no unanimous opinion regarding the making and development of customary law between the developed and developing countries. Currently, there are no hardliners as a positive attitude has reached among all nations on foreign investment, expansion of bilateral treaties and additional investment agreements that has necessitated quick, sufficient and timely compensation for expropriation of foreign investments. Earlier, issues were related to nationalization and now they are related to foreign investment regulation and “indirect expropriation”. In the light of new disputes surfaced regarding indirect expropriation, it has become crucial to define expropriation which in itself has become an issue in international investment law. Scope of Expropriation Before discussing at length on expropriation in international investment law, there is need to define the scope of the word “expropriation” in the current scenario. According to Newcombe (2005, pp. 17-18) there has been a traditional approach widespread in investment treaty practice of defining expropriation. So far out of the 2200 investment treaties made, expropriation is not taken as appropriation or unjust wealth gaining by the state. Nowhere the meaning of the term expropriation is defined; it refers and points out just the government steps that are deemed equal to expropriation. They refer to it as “tantamount to expropriation”. Tribunals in NAFTA Article 1110 on the Pope& Talbot v. Canada and S.D. Myers have mentioned the phrase “measure tantamount to nationalization or expropriation”. It takes the word in its ordinary scope, i.e. tantamount signifies “equivalent” without taking any larger concept on expropriation. Definition of Investment and the notion of property and rights The notion of expropriation is related widely with investment and property. It is managed according to international investment agreements. A broad definition of investment may include licenses, IP, and other government concessions in contracts. Expropriation Expropriation or takings, as per the international investment agreements, is generally of three types: “Direct, Indirect, and measures equivalent or tantamount to expropriation” Direct takings– to elucidate with an example, the Land Reform Program in Zimbabwe leading to taking possession of foreign held physical property is referred as direct expropriation. Indirect – sometimes taken as regulatory takings. However, according to Prof Sornarajah, indirect is similar to direct in the matter of effects but does not essentially result in the physical take over of the property. Tantamount or equivalent to expropriation – regulatory takings potentially with very wider, serious meaning. There are hints by the tribunal on Waste Management versus Mexico that NAFTA “drafters entertained a broad view of what might be “tantamount to an expropriation””. It points out on the greater horizon of expropriation in BITs than as it is identified in traditional international law. According to Newcombe (2005), there is no hint given on agreeing that BIT treaty drafters had any such wider implications of the term “expropriation” in international law. Investment Protection – History of FCN Treaties According to Lowe (2006, pp. 10-13) treaties of friendship, commerce, and navigation are known as FCN Treaties. The 1948 Italy-USA FCN was the basis of American claim against Italy in the ELSI case. In this specific case, an Italian associate of two American companies was taken over and sold by the Italian government to safeguard its financial interests, which was a breach of various treaty provisions. There is a long history of FCN treaties. Further, attempts were made to reach multilateral agreements among different stakeholders after the coming into existence in 1948 of the United Nations System such as the 1948 draft of Havana Charter for setting up an International Trade Organization, which was thwarted by the US. Only a part of the agreement came into formation of the General Agreement on Tariffs and Trade – the GATT. Later, in 1957, the Abs-Shawcross Draft Convention was formed, which was adopted with some revisions in 1967 by the Organization for Economic Co-operation and Development as the OECD Convention on the Protection of Foreign Property. Comparative benefits of international investment treaties In the words of Jeffrey Sachs, Lowe (2006, p. 9) a supporter of global corporate capitalism and the Special Advisor to the UN Ex-General Secretary, Kofi Annan, in his book The End of Poverty “high rates of foreign direct investment inflows have been associated with rapid economic growth.” So for speeding the pace of economic growth, foreign direct investment is welcomed by all governments. So that foreign investors don’t indulge in excessive profit making, host governments put some regulatory control over the foreign investors’ activities. This is done via applying higher taxes or taking their property into state ownership – an extreme to go that is called expropriating. So that such drastic state initiatives don’t become a hindrance in the flow of foreign direct investment and create a bad environment, investment protection agreements were drafted to secure the investors from such risks where the state interfered unnecessarily with the property rights of investors. Such tendencies were seen in both developing and developed nations. Taking for example the coal and railway industries of the United Kingdom that were taken over by the government for many years under its control in the name of public interest, which was not a right step. According to Newcombe (2005), the topic of regulatory expropriation in international law came into prominence due to three important claims made under the North American Free Trade Agreement (NAFTA). These were between Metalclad v. Mexico regarding a hazardous waste site, Ethyl v. Canada on a fuel additive and Azinian v. Mexico involving a municipal waste concession, creating controversy over the limitations of investment obligations and transparency, legality and accountability of the investor-state arbitration process. The claims made in these cases paved the way for the non-government organizations to play an-all important role in gaining support against OECDs Multilateral Agreement on Investment (MAI). The issue of expropriation has although been discussed in academic studies but no line of demarcation has been made between expropriation and regulation. Regulatory expropriation has been particularly examined but it throws no light on policies and factors that help the law in taking decisions on regulatory expropriation cases. There are examples, Newcombe ( 2005, pp. 1-3).where foreign and national investors have been robbed of their investment by a government ban on casinos due to negative social implications and affects of gambling on the society. All casinos were ordered to be closed without differentiating between national and foreign investors’ casino operations. In another case when the government came to know by a study of billboards on national highways that viewing the advertisements while driving resulted in more road accidents, the government banned all such advertisements, incurring huge losses to the foreign investor’s highway advertising business In such cases where governments take regulatory steps to save the public from the ill-affects of an economic activity that result in investment loss, international expropriation law doesn’t provide a solution on how to compensate the investor. Actually, most of the expropriation cases are different types of government appropriation although from international perspective they are issues of deprivation that need a thorough examination. Newcombe (2005, p. 5) has argued that regulatory expropriation claims are related to the right distribution of risk in a regulated state. There are no guidelines on how to maintain a balance between the powers of the government and rights of foreign investors. Certain policies and factors need to be decided by the tribunals that play a part in measuring the risks in rightly equating and demarcating a line between the rights of investors and powers that be. International expropriation law should provide a minimum level of security to foreign investors against such actions of the host government. Search for an optimal balance between the state stakes and security of property should not be made to find by the law tribunals internationally. That should be the responsibility of a country’s law makers. The examples of casinos closing and removing billboards on the national highway by the government necessitate the formation of such a law that provides security to foreign investors’ capital. Expropriation as appropriation: an alternative conceptual framework Expropriation in international law means denying a foreign investor gained rights, resulting in acquisition or appropriation of such rights either by the state or the third party although not explicit by the state. Any such direct or indirect state appropriation of foreign property rights is prima facie case of expropriated property. Compensation against the acquired property is very much inherent as referred in the classical international decisions on expropriation. Such expressions are underlined in the principles of corrective justice and unjust enrichment. It has been pointed specifically by the International Law Commission Special Rapporteur García-Amador in his Fourth Report: “the very raison d’être of compensation for expropriation ordered in the public interest is the idea that the State, i.e. the community, must not benefit unduly at the expense of private individuals.” Taking the example of Canadian law where it is difficult to get regulatory expropriation as they don’t get converted in appropriation of property rights. Notwithstanding the law, the Supreme Court of Canada has remarked that the government can expropriate property indirectly via regulation. In Manitoba Fisheries Ltd. v. R., the Court held that the goodwill of Manitoba had been acquired statutorily, which was overthrown by a legislation, prohibiting fishery business by Manitoba Fisheries. Legislation didn’t provide explicit compensation; the court ordered that compensation should be awarded to Manitoba Fisheries. In another case between the British Columbia v. Tener, the government denied access to Tener on land where mineral claims were located; the Court found that the government had recovered under the Park Act some part of mineral rights granted to Tener. It is a classic example of an indirect environmental expropriation. The government didn’t buy the claim or permitted exploitation in an eco-friendly way and just forbade access permits to the park. The Court decision went in favor of Tener, regaining the rights earlier granted by the British Columbia (Newcombe 2005, pp. 6-7). In some extra-ordinary situations, international investment law does not award compensation of depriving foreign capital assets. Such justifications exist for the sake of public order & morality, protection of human health and the environment and state taxation is yet another popular category of non-compensable appropriation (Newcombe 2005, p. 23). Expropriation “As Provided by Law” A theme not getting exposure is regarding expropriation measures that need to be taken “as provided by law”. The European Court on Human Rights has since 1990s underlined the importance of this clause under the body structure of the European Convention on Human Rights. The implications of this clause should be taken in conjunction with the review of such laws; the courts should pay regard to legislative measures more than administrative measures. Such an attitude will not adversely affect the general international law. Administrative decisions could be arbitrary and discriminatory but taking a decision on what comes under the legislative domestic branch and what comes under the executive depends on ground realities and situations of the case study. Whatever be the situation, the principle of domestic jurisdiction stands intact. In such cases, the court has pinpointed the importance of relevancy of administrative measures with agreed legislative acts as well as with related judicial rulings. In the case of Elettronica Sicula, this approach was ignored by the majority, not recognizing the importance of national judicial review, thus creating a contrast to the agreed notion of considering earlier judicial pronouncements. The European Convention puts greater emphasis on domestic legality. The focus has become more visible with the entry of Central and Eastern European nations in the Convention, which were not following democratic practices before. This “orderly process” will help in creating the environment where rule of law is supreme and not in opposition and favor of any one, starting a trend where decisions are taken through a fair process in relation to the law governing regulation and expropriation (Dolzer 2002, pp. 74-75). In a legally prescribed expropriation, international investment agreements are signed by both the parties, agreeing on not resorting to expropriation unless it is for a public purpose, carries instant, sufficient, and effective compensation, and follows due course of action. If expropriation takes place without adhering to the above terms, it is a breach of the contract, which may result in severe sanctions for unwanted expropriation. Conclusion Boundaries of investment protection are ever-changing in the arena of international investment law on expropriation. Law has been taking recourse to the right direction although international protection of investment law on expropriation is in its initial stage where principles are being argued and discussed at length to find an amicable solution to the issues at stake by the law community worldwide. To sum up -- expropriation – direct or indirect needs compensation on the basis of rules on customary set of international law. Deciding on the category of expropriation whether it is indirect expropriation or not, is very crucial as it needs tribunals to minutely read the treaties. A line has yet to be demarcated between indirect expropriation and non-rewarding regulatory government assessments. It has been recognized that governments have rights to protect via non-discriminatory actions human health and safety, market integrity and social policies without providing reward for any resultant loss to foreign owned property. Bibliography Articles 1 OECD “Indirect expropriation and the right to regulate in international investment law” 2004 2 Lowe V “Changing Dimensions of International Investment Law” 2007 Working Paper No 4 3 Newcombe A “The Boundaries of Regulatory Expropriation in International Law” 2005 20:1 ICSID Review – FILJ 4 Dolzer R “Indirect expropriations: new developments?” 2002 N.Y.U. Environmental law journal Volume 11 Read More