Expropriation: Legality of the Procedure and the Nuances of Application

Introduction

There is a settled law that no assets of foreigners can be expropriated by a country without sufficient compensation regardless of the purpose for which i.e. public purpose or otherwise, the assets are taken. Originally, until twenty-five years ago, disputes before courts and academic debates centred around standard compensation and estimation of expropriated value. Today, bilateral treaties between governments do provide for compensation to meet the ends of justice in case of expropriation. However, the disputes over direct expropriation during the 70s and 80s mainly over nationalisation have since ceased and given place to indirect expropriation disputes. Indirect appropriation arises when governments are prompted to expropriate without having to compensate under the pretext of regulatory measures for environmental protection, health and other welfare measures for society (OECD, 2004).

The Hull formula

When Mexico nationalised the agricultural lands of American nationals in 1938, the then Secretary of State Hull maintained that “ prompt, adequate and effective” compensation for expropriation was the tenets of international law and came to be known as the “Hull formula” which the capital-exporting countries such as the United States and European countries Great Britain and West Germany have maintained as the recognised international law though Mexico did not accept it nor any International Arbitral Tribunal passed any decision to that effect. There was no support for this view not only from third world countries but also the Supreme Court of the United States despite the pleas of executive and legislative branches to affirm the Hull formula as law. In 1965, the American Law Institute in its “The ReStatement of Foreign Relations Law” considered the Hull formula to be qualified by “what is reasonable in the circumstances” and concepts “less than the full value” or “market value” could be applicable in certain cases like land reform. The revised ReStatement rejected the Hull formula as an internationally accepted law. The Aminoil Kuwait arbitration stated that “the determination of the amount of the award of appropriate compensation is better carried out by means of an enquiry into all the circumstances relevant to the particular concrete case than through abstract theoretical discussion”. It also Stated “with respect to every long-term contract, especially such as involves an important investment, there must necessarily be economic calculations, and the weighing-up of rights and obligations, of chances and risks, constituting the contractual equilibrium”. It has been argued that the contracting firm should have anticipated nationalization trend of petroleum concessions by Arab countries and formed its own understanding of the standard of compensation. The term “appropriate” which is near equivalent to “just” and “equitable” are apt to be perceived differently by negotiating parties and the arbitrator. If a single property or investment is involved, the appropriate compensation would mean “full market value” if it could be ascertained. Some governments have argued that in cases of companies having short valued projects for avoiding taxation, it would be unjust and inappropriate to reduce compensation based on the low project value. This occurs when book values are taken for compensation estimates which might have even given due weightage for the inflation. Payment by bonds was not considered as “prompt” according to the Hull formula but it would not be unjust if the interest on bonds were in accordance with market rates. In cases of large-scale expropriation involving lands which a State can compensate in full, “less than full value would be just compensation” as otherwise, it would be “an overwhelming financial burden” for the expropriating State. The question still not answered is whether “just compensation” is an obligation of international law (Schachter, 1985).

Calvo doctrine/clause

Carlos Calvo, an Argentinean jurist propounded a theory in 1896 that the government’s responsibility towards foreigners should not be greater than the responsibility towards their own citizens. In the North American Dredging case of 1926, the relevant contract had a clause that treated the foreign contractor and his employees as Mexicans in all matters thus depriving them of rights as aliens. The United States-Mexican Claims Commission observed that the contractor investor had waived his right to diplomatic protection and hence rejected the claim. Mexico which had been a strong advocate of the Calvo doctrine, later accepted chapter XI of the NAFTA. Many bilateral treaties which the Latin American countries later entered into did not have the Calvo clause. On the other hand, the U.S. enacted Trade Promotion Authority Act in 2002 which envisaged that foreign investors in the U.S. could not have substantive rights which are greater than that of the U.S. nationals (CIEL, 2003).

Thus, expropriation cannot be resorted to unless it is for a public purpose, non-discriminatory, preceded by due process of law and with compensation.

Permanent sovereignty over natural resources as per General Assembly Resolution 1803 (XVII) of 14 December 1962, is a right by the countries and their peoples which should be exercised for the national development and well-being of the people. Expropriation, nationalisation or requisitioning shall be governed by public utility reasons, security or national interest which should override individual or private interests and should be followed by payment of appropriate compensation as per prevailing rules. If the question of compensation raises controversy, national jurisdiction over such matters should be exhausted before referring the matter for international arbitration or adjudication (Reinisch, n.d.).

Article 2 of Charter of Economic Rights and Duties of States (CERDS) 1974 of the U.N. recognises the right of every State to permit foreign investment in accordance with its local laws and in conformity with its national objectives and priorities. Article 2(2) provides for appropriate compensation for nationalisation, expropriation or transfer of ownership of foreign property (Reinisch, n.d.)

Conclusion

In view of the above, the Calvo doctrine is still relevant in that foreign nationals cannot be treated preferentially and hence the foreign investors should be prepared to assume the element of risk involved and to which the local people are equally exposed. There can be situations of not affecting local people and enterprises in which case the appropriate compensation is the only remedy provided it is fully secured by bilateral investments treaties (BIT). If any direct or indirect appropriation has resorted in contravention, the capital-exporting State can prevail against the importing State.

References

CIEL. (2003). International Law on Investment. The Minimum Standard of Tretament. The Center for International Environmental Law.

OECD. (2004). “Indirect Expropriation” and the ” Right to regulate” in International Investment Law. Organisation for Economic Co-operation and Development.

Reinisch, A. (n.d. ). Expropriation in International Investment Law. University of Vienna, Austria.

Schachter, O. (1985). International Law in Theory and Practice. Netherlands: Martinus Nijhoff Publishers.