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12
Protection Against Expropriation,
Nationalization, and Dispossession

12.1 The Risk of Expropriation, Nationalization,

and Dispossession
An age-old, overriding concern of all foreign investors is that host country govern-
ments will seize their assets. Such uncertainty over the security of property rights
is the essence of political risk.1 Whenever a foreign investor places its assets in a
foreign territory, it thereby subjects them to the jurisdiction of the host country
government. Those assets then become susceptible to host country legislative and
administrative acts, including expropriation, nationalization, dispossession, and
alteration of property rights.
In contemplating an investment in a foreign country, investors always calculate
the risk of expropriation and dispossession. That calculation is invariably rendered
difficult by the fact that investments are long-term transactions, often projected to
extend over many years and even decades into an always uncertain future. While
conditions may appear safe for investment property at the time the investment is
made, those conditions can change rapidly and dramatically as a result of shift-
ing political and economic dynamics in host countries, the regions in which they
are located, and indeed the world itself. Popular uprisings, wars, regime changes,
coups, economic crises, and insurrections are just a few of the events that can
place investor property rights in jeopardy. In response to such events, govern-
ments may use their legislative and administrative powers to revise investors’ legal
rights in ways they consider to be in the public interest.
One may view an investment at the time it is made as a bargain between the
investor and the host country government as to their respective rights to benefit
from that investment. In response to subsequent political and economic realities,
governments often seek to change the terms of that bargain unilaterally by alter-
ing investors’ legal rights in ways that increase the government’s benefits from the
investment and decrease the investor’s.
The most dramatic way in which governments can change this bargain is by seiz-
ing an investment and thereby cancelling the investor’s property rights. Thus, for

1 N Rubins and NS Kinsella, International Investment, Political Risk and Dispute

Resolution: A Practitioner’s Guide (Oceana Publications, 2005) 1–29.

The Law of Investment Treaties. Second Edition. Jeswald W. Salacuse, Oxford University Press. © Jeswald W. Salacuse 2015.
DOI: 10.1093/law/9780198703976.003.0012
314 Protection Against Expropriation
example, governments can simply seize factories, mines, plantations, and other physical

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assets owned and controlled by foreign investors. Such direct expropriations were a con-
stant concern throughout the nineteenth and twentieth centuries. As was discussed in
Chapter 3, the twentieth century witnessed significant expropriations of foreign invest-
ment in Latin America, the Soviet Union, the Middle East, and Eastern Europe. In
those cases, the governments asserted their legal rights to take the property and denied
any obligation to compensate investors for what they had taken. As will be recalled,
such actions raised a fundamental question as to the standard of treatment that host
countries legally owed to foreign investors. Host governments asserted that they owed
no more than ‘national treatment’, that is, treatment no better than they gave their own
nationals, while capital-exporting states claimed that host countries had an obligation
to accord foreign investors an international minimum standard of treatment. With spe-
cific reference to expropriation, the United States and western European governments
claimed that the international standard allowed host governments to expropriate for-
eign investments only for a public purpose, in a non-discriminatory manner, in accord-
ance with due process of law, and upon payment, in the words of the Hull formula, of
‘prompt, adequate, and effective compensation’. The dispute over the conditions under
which a host state could expropriate continued into the post-World War II era when
newly decolonized countries in the 1960s and 1970s called for a New International
Economic Order. The investment treaty movement was an effort to resolve that debate
by securing agreement on international rules to protect the property rights of foreign
investors. Thus, the modern international regime for the protection of investor property
evolved through a treaty-making process that, among other things, sought to establish
clear and enforceable international legal rules to protect investor property rights. This
chapter examines the nature and effect of those treaty provisions.
Just as international investment law has evolved over time so, too, have the
methods by which governments seek to modify or interfere with investor property
rights. Whereas outright expropriation through government seizure was common
until the 1980s, it has become an increasingly less common phenomenon thereaf-
ter. In the twenty-first century, governments dissatisfied with the original bargains
made with foreign investors rarely send their troops to seize a factory or occupy a
mine; instead, they use their legislative and regulatory power in more subtle ways
to alter the benefits flowing to the investor from the investment. Thus, a govern-
ment may impose new regulations on the way the investment is operated, raise
taxes on the investment substantially, or unilaterally change a contract to reduce
the revenues flowing to a concessionaire. The investor remains in possession of the
investment, but the amount and nature of the benefits originally contemplated are
significantly reduced. In legal terms, these regulatory actions diminish the nature
of the investor’s property rights over the investment and, if sufficiently extreme,
may constitute a form of expropriation or dispossession. Such actions may rise
to the level of an ‘indirect’ expropriation, sometimes referred to as ‘regulatory
taking’.2 They have become the most common type of intervention with foreign

2 SR Ratner, ‘Regulatory Takings in the Institutional Context: Beyond the Fear of Fragmented
International Law’ (2008) 102 AJIL 475.
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investments by host governments in the twenty-first century. As will be seen,
one challenge in interpreting treaty provisions on expropriation is determining
whether and to what extent such provisions protect covered assets against various
forms of administrative and regulatory actions that negatively affect but nonethe-
less leave the investor in possession of the investment. This shift in governmental
tactics has led to a change in the legal debate about the definition of expropria-
tion and nationalization and also whether traditional principles of international
law apply to legislative and regulatory actions that leave investors in possession
of investment assets but diminish their freedom to control, manage, and derive
benefits from them. In short, the challenge for scholars, arbitrators, and lawyers,
is to determine the dividing line between investors’ property rights and the host
governments’ reasonable right to regulate investments.
One should not assume, however, that old fashioned techniques of expropria-
tion are things of the past. Two highly publicized direct expropriations that did
take place in the early twenty-first century were the seizure in 2004 by the Russian
government of the assets of Yukos, at the time a leading privately owned Russian
oil company, and the nationalization in 2012 by the Argentine government of a
51 per cent interest in YPF, an Argentine oil company, whose majority shareholder
was Repsol, a Spanish energy corporation. In both cases, title to the investor’s
assets was transferred to the state or state-owned enterprises through a variety of
legal means undertaken by the governments concerned. Both cases would result
in arbitration under investment treaties in which the investors challenged such
actions as illegal under international law. In 2005, shareholders in Yukos would
bring three separate UNCITRAL arbitrations employing the institutional aus-
pices of the Permanent Court of Arbitration under the Energy Charter Treaty
(ECT),3 claiming a total of US$114 billion. In 2012, Repsol would commence an
ICSID arbitration4 against Argentina under the Argentina–Spain bilateral invest-
ment treaty (BIT) for US$10.5 billion. Both arbitrations would conclude in 2014.
In March 2014, Repsol and Argentina agreed to settle their dispute with the pay-
ment of US$5billion in bonds issued by Argentina, and in July of the same year,
the tribunal in the Yukos cases issued awards5 totalling more than US$50 bil-
lion, the largest amount of damages ever awarded in the history of international
arbitration.

3 Hulley Enterprises Ltd (Cyprus) v The Russian Federation, PCA AA 226 (Final Award) (18 July
2014); Yukos Universal Ltd (Isle of Man) v the Russian Federation, PCA AA 227 (Final Award) (18
July 2014); and Veteran Petroleum Ltd (Cyprus) v the Russian Federation, PCA AA 228 (Final Award)
(18 July 2014).
4 Repsol SA and Repsol Butano SA v Argentine Republic, ICSID Case No ARB/12/28
(Discontinued) (19 May 2014).
5 Hulley Enterprises Ltd (Cyprus) v The Russian Federation, PCA AA 226 (Final Award) (18 July
2014) ¶ 339; Yukos Universal Ltd (Isle of Man) v the Russian Federation, PCA AA 227 (Final Award)
(18 July 2014); Veteran Petroleum Ltd (Cyprus) v the Russian Federation, PCA AA 228 (Final Award)
(18 July 2014). The three awards probably also set a historic record for length, since each was nearly
600 pages long.
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12.2 Investment Treaty Provisions
on Expropriation, Nationalization, and Dispossession

Because the investment treaty movement arose during a period when many expro-
priations and nationalizations had taken place and states exhibited significant
disagreement about the applicable international law, one of the primary goals
of capital-exporting countries in promoting investment treaties was to protect
their investors and investments from acts of expropriation, nationalization, and
dispossession by host governments.6 In other words, their goal was to preserve
the original bargain that the investor had made with the host government when
it entered the country. As a result, virtually all investment treaties contain a pro-
vision concerning the expropriation or nationalization of covered investments;
however, the nature of those provisions, their scope, and the limitations they place
on governmental action, vary among treaties.
All treaties use similar words to refer to the phenomenon of governmental
interference with the property rights of investors: expropriation, nationalization,
dispossession, or some combination thereof. Most treaties refer to both expropria-
tion and nationalization. Thus, Article 1110 of the North American Free Trade
Agreement (NAFTA) provides that ‘[n]‌o Party may directly or indirectly nation-
alize or expropriate an investment of an investor of another Party in its territory’;
however, NAFTA does not define expropriation or nationalization or explain how
or whether the two terms differ.7 Some scholars have argued that the term ‘nation-
alization’ applies only to state seizure of an entire industry while implementing a
new economic policy, whereas ‘expropriation’ refers to the seizure of a particular
asset or investment.8 Although investment treaties do not specifically recognize
this distinction, their use of both words arguably indicates an intention to cover
both situations and to avoid any suggestion that a governmental taking labelled
as a ‘nationalization’ is somehow exempt from treaty coverage. This chapter will
use the term ‘expropriate’ or ‘expropriation’ to apply to the various forms of state
takings, however they may be denominated.
All treaty provisions on expropriation are alike in two fundamental respects.
First, they all recognize the right of host countries to nationalize, expropriate,
or dispossess an investor’s investment. Such treaty provisions thus acknowledge
an important incident of a state’s territorial sovereignty and embody the classical
principle of international law that a state has the right to expropriate an alien’s

6 UNCTAD, Bilateral Investment Treaties in the Mid-1990s (1998) 65.

7 See also Agreement among the Government of Japan, the Government of the Republic of
Korea and the Government of the People’s Republic of China for the Promotion, Facilitation
and Protection of Investment (13 May 2012), Art 11.1: ‘No Contracting Party shall expropriate
or nationalize investments in its territory of investors of another Contracting Party or take any
measure equivalent to expropriation or nationalization (hereinafter referred to in this Agreement
as “expropriation”) . . .’.
8 M Sornarajah, The International Law on Foreign Investment (2nd edn, Cambridge University
Press, 2004) 347–48; UNCTAD, Bilateral Investment Treaties in the Mid-1990s (1998) 65.
 Investment Treaty Provisions 317

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property.9 The justification for this principle is that the fundamental purpose of
the state is to protect and preserve the public interest of its citizens and that if such
interest will be properly safeguarded by expropriation, then the state must be free
to pursue that course of action.10 Second, all treaties purport to place limitations
or conditions on a state’s exercise of its right to expropriate, nationalize, or dispos-
sess a covered investment. Thus, while a state has a right to expropriate, the exer-
cise of that right, to be legal under the applicable treaty, must be done according
to specified conditions. Accordingly, nearly all treaties adopt a specific linguistic
formula that first states that no contracting party shall nationalize or expropriate
investments of the other contracting party, but then proceeds to specify the excep-
tions to the purported ban. Article 1110 of NAFTA is one example:
1. No Party may directly or indirectly nationalize or expropriate an investment of an
investor of another Party in its territory or take a measure tantamount to nationaliza-
tion or expropriation of such an investment (‘expropriation’), except:
(a) for a public purpose;
(b) on a non-discriminatory basis;
(c) in accordance with due process of law and Article 1105(1); and
(d) on payment of compensation in accordance with paragraphs 2 through 6.11

Article 13(1) of the ECT adopts a similar approach:

(1) Investments of Investors of a Contracting Party in the Area of any other Contracting
Party shall not be nationalized, expropriated or subjected to a measure or measures
having effect equivalent to nationalization or expropriation (hereinafter referred to as
‘Expropriation’) except where such Expropriation is:
(a) for a purpose which is in the public interest;
(b) not discriminatory;
(c) carried out under due process of law; and
(d) accompanied by the payment of prompt, adequate and effective compensation.12

As will be seen later in this chapter, it is in the nature of the conditions and
limitations placed on expropriation that one finds significant variation among
treaties. Before considering such conditions, it is important to determine the
scope and meaning of the expropriatory acts that are covered by the expropria-
tion treaty clauses. An act that falls outside that scope is not an expropriation
or nationalization and so is not subject to the limitations and conditions of the
investment treaty—including the obligation of the host state to pay compensa-
tion. This chapter will first examine the scope of coverage of expropriation provi-
sions as they apply to direct and indirect takings of investor property by a state. It
will then consider the various conditions and limitations that treaties place upon
such state actions, including the obligation to pay compensation.

9 R Dolzer and C Schreuer, Principles of International Investment Law (OUP, 2007) 89.
10 I Delupis, Finance and Protection of Investments in Developing Countries (Gower Technical
Press, 1975) 31.
11 North American Free Trade Agreement (17 December 1992), (1994) 32 ILM 612.
12 The Energy Charter Treaty (17 December 1994), 2080 UNTS 100 (ECT).
318 Protection Against Expropriation

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12.3 The Scope of Expropriation, Nationalization,
and Dispossession Clauses
In interpreting expropriation clauses, three elements are of fundamental concern:
(1) the nature of the expropriating actor; (2) the nature of the property expropri-
ated; and (3) the nature of the expropriatory act.

(a) The nature of the expropriating actor

Treaty provisions on expropriation are aimed at actions by the contracting states,
not by private persons, organizations, or non-contracting states. The act com-
plained of as expropriatory must be attributable to a contracting state. For exam-
ple, the seizure of an investor’s factory by workers without government authority
or connivance would not ordinarily constitute an expropriation; however, the host
government’s failure to restore the property to the investor might be a denial of full
protection and security required by the applicable treaty. In all investment treaties,
an expropriation is a governmental action that is forbidden by the treaty except
upon specified conditions. Governments take all kinds of actions constantly. The
challenge in applying an investment treaty is to determine which governmental
actions fall within the category of expropriation under the applicable treaty.

(b) The nature of the property expropriated

Investment treaties protect ‘investments’ from expropriation. As Chapter 7 indi-
cated, treaties define the term ‘investments’ broadly to include both tangible and
intangible assets. Thus, depending on the breadth of that definition, expropriation
clauses may not only protect physical property, such as land and buildings, but
also intangible forms of property, such as contractual rights, intellectual property
rights, and government business concessions.
Even before the advent of investment treaties, courts and tribunals recognized
that contractual rights could also be subject to expropriation. In Norwegian
Shipowners’ Claims, one of the very first cases to decide the question, the US
government seized ships built for Norwegian nationals in US shipyards during
World War I and cancelled ship construction contracts with Norwegian nation-
als. A government entity, ‘the Fleet Corporation’, took over the ships and the
contracts. In response to Norwegian claims of expropriation, the United States
argued that contractual rights could not be considered property for purposes of
international law. The arbitral tribunal rejected this broad assertion, referring to
both US and Norwegian domestic law. It held that ‘the Fleet Corporation took
over the legal rights and duties of the ship owners toward the shipbuilders’13

13 Norwegian Shipowners’ Claims (Norway v United States) (Perm Ct Arb 1922) 1 RIAA 307,
332, 233. See also A Reinisch, ‘Expropriation’ in P Muchlinski et al (eds), The Oxford Handbook of
International Investment Law (OUP, 2008) 407, 411–12.
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and that the cancellation of existing ship-building contracts amounted to de
facto expropriation.14 Consequently, it ordered the payment of appropriate
compensation.
The Chorzów Factory case concerned the effect of Polish measures directed
against Bayerische, a German company that had the contractual right to
manage and operate a nitrate plant, the Chorzów Factory, owned by another
German company. The Permanent Court of International Justice held that the
Polish measures expropriated both the factory owner and the company holding
contractual rights to the factory: ‘it is clear that the rights of the Bayerische to
the exploitation of the factory and to the remuneration fixed by the contract for
the management of the exploitation and for the use of its patents, licenses, experi-
ments, etc., have been directly prejudiced by the taking over of the factory by
Poland’.15 The Iran-US claims tribunal16 and other international tribunals have
relied on and reaffirmed the Chorzów Factory holding when deciding claims of
interference with rights arising under a contract and other forms of intangible
property.
Following the development of investment treaties, arbitration tribunals have
consistently recognized that intangible as well as tangible property may be the sub-
ject of expropriation.17 As was stated very clearly in the Methanex case: ‘Certainly,
the restrictive notion of property as a material “thing” is obsolete and has ceded
its place to a contemporary conception which includes managerial control over
components of a process that is wealth producing.’18 Indeed, in contemporary
practice the most prevalent types of alleged expropriations under treaties, and
usually the most difficult legal questions, involve governmental measures affect-
ing intangible rights.

14 ‘[W]‌hatever the intentions may have been, the United States took, both in fact and in law,
the contracts under which the ships in question were being or were to be constructed’. Norwegian
Shipowners’ Claims (n 13 above) 325.
15 Case Concerning Certain German Interests in Polish Upper Silesia (FRG v Poland) (1926) PCIJ
Series A, No 7, at 44.
16 In the Amoco case, the tribunal determined that ‘[i]‌n spite of the fact that it is nearly sixty
years old, this judgment is widely regarded as the most authoritative exposition of the principles
applicable in this field, and is still valid today’. Amoco International Finance Corp v Iran (1987) 15
Iran-USCTR 189, ¶ 191.
17 Fireman’s Fund Insurance Co v United Mexican States, ICSID Case No ARB(AF)/02/1 (Award)
(17 July 2006) ¶ 176. See also Biloune and Marine Drive Complex Ltd v Ghana Investments Centre
and the Government of Ghana, UNCITRAL (Award on Jurisdiction and Liability) (27 October
1989), a non-treaty case in which the investor concluded a ten-year lease contract to renovate and
manage a restaurant with an agency of the Ghana government. The Accra City Council subse-
quently ordered work to stop on the project and demolished the facility. In its award in favour of the
claimant, the ad hoc tribunal stated: ‘such prevention of [an investor] from pursuing its approved
project would constitute constructive expropriation of [the investor]’s contractual rights in the pro-
ject . . . unless the Respondents can establish by persuasive evidence sufficient justification for these
events’.
18 Methanex v United States, UNCITRAL (Final Award) (3 August 2005), Part IV, Ch D, p 7.
320 Protection Against Expropriation

(c) The nature of the expropriating act

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Most expropriation provisions refer to governmental actions as ‘measures’.
For example, the BIT between Peru and Paraguay provides: ‘Neither of the
Contracting Parties shall adopt, directly or indirectly, measures of expropriation,
nationalization or any other measure of the same nature or effect against the
investments of the other Contracting Party.’19 Investment treaties do not usu-
ally define ‘measure’, but one accepted dictionary definition is ‘a course of action
intended to obtain some object’.20 It is unclear whether a government’s failure
or refusal to act can constitute a ‘measure’ under an expropriation clause. For
example, suppose a government has induced a foreign investor to buy land and
build a factory, but once the factory is built, fails to grant the necessary operating
permit because of conflict within the government bureaucracy. Would the failure
to deliver the permit constitute a ‘measure of expropriation’? In one of the few
arbitral decisions to consider the meaning of ‘measure’ in an expropriation clause,
the tribunal in Mr Euduro Armando Olguín v Republic of Paraguay, applying the
Peru–Paraguay BIT just quoted, stated:
For an expropriation to occur, there must be actions that can be considered reasonably
appropriate for producing the effect of depriving the affected party of the property it
owns, in such a way that whoever performs those actions will acquire, directly or indi-
rectly, control, or at least the fruits of the expropriated property. Expropriation therefore
requires a teleologically driven action for it to occur; omissions, however egregious they
may be, are not sufficient for it to take place.21
On the other hand, a formal decision by a government not to grant a requested
licence probably would fit the definition of a ‘measure’, since it could be viewed as
an act done to achieve a desired end. What is less clear is whether a government’s
inaction or mere failure to decide, in response to a licence request by an investor,
constitutes a ‘measure’ under the applicable treaty.
As can be seen from the expropriation provisions in NAFTA and the ECT set
out earlier, treaty provisions on expropriation do not generally define ‘expropria-
tion’ or ‘nationalization’ or specify the elements that must be present to constitute
an expropriatory governmental action. Nor do they specify the difference between
direct and indirect expropriation or provide guidance in determining whether a
governmental act is ‘tantamount to’ or has the ‘equivalent effect’ of expropriation.
The brevity and conciseness of such formulations do not make their application

19 Convenio Entre La República del Perú y La República del Paraguay Sobre Promoción
y Protección Reciproca de Inversiones (31 January 1994), Art 6.1. The original Spanish version
of this provision (the only official language of the treaty) states: ‘Ninguna de las Partes Con-
tratantes adoptará, directa o indirectamente, medidas de expropiación, nacionalización o cualquier
otra medida de la misma naturaleza o efecto, contra inversiones de nacionales de la otra Parte
Contratante.’
20 Oxford English Dictionary (2nd edn, OUP, 1989).
21 Mr Euduro Armando Olguín v Republic of Paraguay, ICSID Case No ARB 96/5 (Award) (26
January 2001) ¶ 84. For a contrary view, see A Newcombe and L Paradell, Law and Practice of
Investment Treaties: Standards of Treatment (Kluwer Law International, 2009) 337.
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to the inevitably complex fact situations presented in expropriation cases easy.
Their failure to define or establish any criteria to identify ‘indirect expropriations’
or ‘measures having an effect equivalent to expropriation or nationalization’ fur-
ther exacerbates the problem.22 The apparent reluctance by contracting states to
define these concepts in their treaties may be explained both by the difficulty
treaty negotiators face in predicting the infinite variety of state measures that may
be taken as well as the equally infinite variety of potential investment arrange-
ments.23 The adoption of these open-ended formulations allows expropriation
treaty provisions to capture the multiplicity of host state acts that might have an
expropriatory effect on foreign investment. Such an approach assumes that prin-
ciples of general international law will work to clarify and guide the application of
treaty provisions to specific situations.
A reasonable reading of treaty expropriation provisions, such as those quoted
earlier, indicates that they prohibit three kinds of expropriation: (1) direct expro-
priations or nationalizations; (2) indirect expropriations or nationalizations; and
(3) governmental actions that are tantamount or equivalent to expropriation or
nationalization.
Treaties differ in the way they deal with these three possible types of expropria-
tion. Not all of them follow the comprehensive approach employed by NAFTA
and the ECT. BITs, for example, display a variety of approaches in protecting
against expropriation: (a) some contain provisions that refer only to ‘expropria-
tion’ and ‘nationalization’; (b) others combine the reference to ‘expropriation’ and
‘nationalization’ with ‘measures tantamount to’ or ‘measures having effect of’
expropriation and nationalization; and (c) yet others provide protection against
direct and indirect expropriation.
Treaties in the first category contain only a general clause providing that the
contracting parties ‘shall abstain from taking any measures of expropriation’24
and then specify the conditions under which an expropriation will be considered
lawful. Questions may arise as to whether an investor may invoke such a provision
with respect to an indirect expropriation or regulatory taking. One interpreta-
tion of such provisions is that because they use the plural form ‘any measures of
expropriation’ such provisions are intended to cover various types of expropriatory

22 The tribunal in LG&E Energy Corp stated: ‘Generally, bilateral treaties do not define what
constitutes an expropriation—they just make an express reference to “expropriation” and add the
language “any other action that has equivalent effects”.’ LG&E Energy Corp et al v The Argentine
Republic, ICSID Case No ARB/02/1 (Decision on Liability) (26 September 2006) ¶ 185.
23 R Dolzer and M Stevens, Bilateral Investment Treaties (Kluwer Law International, 1995) 99.
24 eg Agreement between the Government of the Lebanese Republic and the Government of
Malaysia for the Promotion and Protection of Investments (26 February 1998), Art 5:
Neither Contracting Party shall take any measures of expropriation or nationalization
against the investments of an investor of the other Contracting Party except under the
following conditions:
(a) the measures are taken for a lawful or public purpose and under due process of law;
(b) the measures are non-discriminatory;
(c) the measures are accompanied by provisions for the payment of prompt, adequate
and effective compensation.
322 Protection Against Expropriation
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tion. On the other hand, it could also be argued, relying on the interpretation
principle of expressio unius est exclusio alterius (the expression of one thing is the
exclusion of another), that one could interpret the provision as referring to meas-
ures of a direct expropriation only, and not to other kinds of measures, regardless
of whether the latter have an effect equivalent to that of the former. To avoid
possible ambiguities and ensure better investment protection from expropriatory
measures, many international investment agreements provide for more compre-
hensive and specific expropriation clauses.
In addition to referring to ‘expropriation’ and ‘nationalization’, some treaties
extend the concept of expropriation to measures whose effect on investors’ prop-
erty rights and investments is equivalent to what results from direct expropriation.
The expressions most utilized by such investment treaties are ‘measures having
similar effects’, ‘any measures having effect equivalent to nationalization or expro-
priation’, or ‘any other measure the effects of which would be tantamount to expro-
priation or nationalization’. For example, Article 6 of the 1998 Chile–Tunisia BIT
provides: ‘Neither Contracting Party shall nationalize, expropriate or subject the
investments of an investor of the other Contracting Party to any measures having
an equivalent effect’25 (emphasis added).
In another variation, Article 5 of the UK–Sierra Leone BIT of 2000 contains
the following provision:
(1) Investments of nationals or companies of either Contracting Party shall not be nation-
alised, expropriated or subjected to measures having effect equivalent to nationalisation
or expropriation (hereinafter referred to as ‘expropriation’) in the territory of the other
Contracting Party except for a public purpose related to the internal needs of that
Party on a non-discriminatory basis and against prompt, adequate and effective com-
pensation26 (emphasis added).

The following sections of this chapter examine the three types of expropriatory
actions covered in most investment treaties: (1) direct expropriations; (2) indirect
expropriations; and (3) actions tantamount or equivalent to an expropriation.

12.4 Direct Expropriations, Nationalizations,

and Dispossessions

The essential element of an expropriation is a ‘taking’ by the state of property

that belongs to the investor. In a direct expropriation, that taking comes through
state action that deprives the investor of legal title or control of its investments. As

25 Agreement between the Republic of Chile and the Republic of Tunisia on the Reciprocal
Promotion and Protection of Investments (23 October 1998).
26 Agreement between the Government of the United Kingdom of Great Britain and Northern
Ireland and the Government of the Republic of Sierra Leone for the Promotion and Protection of
Investments (13 January 2000).
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the tribunal in Feldman v Mexico observed: ‘Recognizing direct expropriation is
relatively easy: governmental authorities take over a mine or factory, depriving the
investor of all meaningful benefits of ownership and control.’27 In the NAFTA
case of Fireman’s Fund Insurance Company v United Mexican States, the tribunal,
summarizing the jurisprudence of ten previous decisions on expropriation under
Article 1110, identified the key elements necessary to sustain an investor’s claim
of expropriation and the requirements of a ‘taking’:28
a. Expropriation requires a taking (which may include destruction) by a government-type
authority of an investment by an investor covered by the NAFTA.
b. The covered investment may include intangible as well as tangible property.29
c. The taking must be a substantially complete deprivation of the economic use and
enjoyment of the rights to the property, or of identifiable distinct parts thereof (ie it
approaches total impairment).
d. The taking must be permanent, and not ephemeral or temporary.
e. The taking usually involves a transfer of ownership to another person (frequently the
government authority concerned), but that need not necessarily be so in certain cases
(eg total destruction of an investment due to measures by a government authority
without transfer of rights).
f. The effects of the host state’s measures are dispositive, not the underlying intent, for
determining whether there is expropriation.
g. The taking may be de jure or de facto.
h. The taking may be ‘direct’ or ‘indirect’.30
i. The taking may have the form of a single measure or a series of related or unrelated
measures over a period of time (the so-called ‘creeping’ expropriation).31
Although this summary of the elements necessary for expropriatory taking was made
with specific reference to NAFTA, it is applicable to the expropriation provisions of most
investment treaties, which, like NAFTA, do not define expropriation or specify its essen-
tial elements.

27 Feldman v Mexico, ICSID Case No ARB(AF)/99/1 (Award on Merits) (16 December

2002) ¶ 100.
28 Fireman’s Fund Insurance Co v United Mexican States, ICSID Case No ARB(AF)/02/1 (Award)
(17 July 2006) ¶ 176.
29 Citing Mondev International Ltd v United States, ICSID Case No ARB(AF)/99/2 (Award) (11
October 2002) ¶ 98.
30 On this point, the Fireman’s Fund tribunal stated: ‘“Indirect” expropriation is contemplated by
Article 1110(1) of the NAFTA: “No Party may directly or indirectly nationalize or expropriate . . . or
take a measure tantamount to nationalization or expropriation”’ (emphasis added). According to
certain case law, the expression ‘a measure tantamount to nationalization or expropriation’ in
NAFTA, Art 1110 means nothing more than ‘a measure equivalent to nationalization or expro-
priation’. Pope & Talbot Inc v The Government of Canada, UNCITRAL (Interim Award) (26 June
2000) ¶¶ 96, 104; SD Myers, Inc v The Government of Canada, UNCITRAL (Partial Award) (13
November 2000) ¶¶ 285–286; Feldman Kappa v Mexico, ICSID Case No ARB(AF)/99/1 (Award)
(16 December 2002) ¶ 100.
31 ‘Creeping expropriation is a form of indirect expropriation with a distinctive temporal quality
in the sense that it encapsulates the situation whereby a series of acts attributable to the State over
a period of time culminate in the expropriatory taking of such property.’ Generation Ukraine Inc v
Ukraine, ICSID Case No ARB/00/9 (Final Award) (16 September 2003) ¶ 20.22. Creeping expro-
priation applies when no single measure alone is expropriatory. Burlington Resources Inc v Republic
of Ecuador, ICSID Case No ARB/08/5 (Decision on Liability) (14 December 2012) ¶¶ 345–346.
324 Protection Against Expropriation
Although cases of direct expropriation have been rare in recent years, they do

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sometimes occur. In addition to the Yukos and Repsol cases discussed at the begin-
ning of this chapter, the 2000 arbitration case of Swembalt v Latvia32 is of interest.
Swedish investors, believing they had an agreement with appropriate Latvian author-
ities, purchased and renovated a ship to be used as a floating trade centre, which they
towed to and docked in the port of Riga, Latvia. Without notice to the investors, the
port authorities subsequently moved the ship and, ultimately, sold it at auction. The
Swedish investors brought a claim against Latvia under the 1992 Agreement between
the Government of the Kingdom of Sweden and the Government of the Republic
of Latvia on the Promotion and Reciprocal Protection of Investments, alleging that
Latvia had deprived them of their investment. The tribunal found Latvia’s conduct to
be a direct expropriation: ‘The Republic of Latvia, by taking the ship away, prevent-
ing SwemBalt from using it and, finally, by auctioning it and permitting that it be
scrapped without any compensation to SwemBalt, has breached its obligations under
the Investment Agreement and general international law.’33
The tribunal, which awarded the investors over US$2.5 million in compensa-
tion, relied upon Article 4(1) of the Sweden–Latvia BIT,34 which prohibits expro-
priation except upon the conditions stated earlier. The facts of the case presented a
clear instance of direct expropriation because the Latvian authorities took actions
that deprived the investors of control of the ship and ultimately its legal title.
In the Yukos cases, the Russian government, apparently for political motives
due to the fact that Yukos’ principal shareholder Mikhail Khordokovsky was
a political opponent of Russian President Vladimir Putin, caused its taxation
authorities to launch a number of tax cases against Yukos, leading to the freez-
ing of Yukos assets, the rendering of tax claims amounting to billions of dol-
lars against the company, and ultimately the holding of auctions of Yukos assets
to secure payment of those claims but which allowed state enterprises to obtain
Yukos assets at bargain prices. Reviewing the complex facts of the cases, the arbi-
tration tribunal concluded: ‘the auction of YNG [Yukos’ main oil production sub-
sidiary] was not driven by motives of tax collection but by the desire of the State to
acquire Yukos’ most valuable asset and bankrupt Yukos. In short, it was in effect a
devious and calculated expropriation by Respondent of YNG’.35 It acknowledged,

32 Swembalt AB, Sweden v Latvia, UNCITRAL (Award) (23 October 2000).

33 ibid ¶ 38.
34 Agreement between the Government of the Kingdom of Sweden and the Government of the
Republic of Latvia on the Promotion and Reciprocal Protection of Investments (10 March 1992),
Art 4(1), provides:
(1) Neither Contracting Party shall take any measures depriving, directly or indirectly,
an investor of the other Contracting Party of an investment unless the following
conditions are complied with:
(a) the measures are taken in the public interest and under due process of law;
(b) the measures are distinct and not discriminatory; and
(c) the measures are accompanied by provisions for the payment of prompt, adequate
and effective compensation, which shall be transferable without delay in a freely
convertible currency.
35 Hulley Enterprises Ltd (Cyprus) v The Russian Federation, PCA AA 226 (Final Award) (18 July
2014) ¶ 1037; Yukos Universal Ltd (Isle of Man) v the Russian Federation, PCA AA 227, (Final Award)
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however, that ‘Respondent has not explicitly expropriated Yukos or the holdings
of its shareholders, but the measures that Respondent has taken in respect of
Yukos . . . have had an effect “equivalent to nationalization or expropriation”’,36
an implicit reference to the language of Article 13 of the ECT which states that
‘investment . . . shall not be nationalized, expropriated or subjected to measures
having effect equivalent to nationalization or expropriation . . .’.
Where a situation presents a clear case of a taking or seizing control of an inves-
tor’s assets, determining that an expropriation or nationalization has taken place
is usually not difficult. However, a difficulty may arise in determining whether
the asset expropriated is a protected ‘investment’ under the treaty. It should be
noted that treaties do not protect all investor assets from expropriation—only
those that are considered ‘investments’ under the relevant treaty. Chapter 7 dis-
cusses the meaning of ‘investment’ as it is used in investment treaties. Thus, in
the Swembalt case, Latvia argued that the ship and the lease of the area where it
was to be docked did not constitute an investment ‘made in accordance with the
laws and regulations’ of Latvia, as required by the treaty, and therefore it was not
protected against expropriation. The tribunal concluded otherwise in deciding in
favour of the investors.

12.5 Indirect Expropriations, Nationalizations,

and Dispossessions

In the investment climate of the early twenty-first century, direct expropriations

happen infrequently. Far more frequent are indirect expropriations, situations in
which host states invoke their legislative and regulatory powers to enact measures
that reduce the benefits investors derive from their investments but without actu-
ally changing or cancelling investors’ legal title to their assets or diminishing their
control over them. There are various possible explanations for the shift by host
governments from direct expropriations to regulatory actions that may constitute
indirect expropriations. First, host states that need foreign capital may be reluctant
to harm their countries’ investment climate by taking the drastic and conspicu-
ous step of openly seizing foreign property. Official acts that seize title or control
of a foreign investor’s property will attract negative publicity and are likely to do
serious damage to the state’s reputation as a site for foreign investments. Second,
complex contemporary investment transactions, such as concessions, mineral
development agreements, and long-term economic development contracts, which
are based on shared benefits and risks between the host country and the investor
are susceptible to being altered to the benefit of the host country through its regu-
latory power. In short, effective use of regulatory powers allows the host country

(18 July 2014) ¶1037; Veteran Petroleum Ltd (Cyprus) v the Russian Federation, PCA AA 228 (Final
Award) (18 July 2014) ¶ 1037 .
36 ibid ¶ 1580.
326 Protection Against Expropriation
to have many of the benefits of an expropriation without actually taking title or

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seizing control. And third, all host countries have a legitimate right to regulate
investors and investments in their territory, but the precise boundary between
legitimate regulation and acts that violate a Treaty’s expropriation provisions is
often difficult to determine. Thus, while the Feldman tribunal, quoted earlier,
stated that recognizing a direct expropriation was relatively easy, it also said, ‘it
is much less clear when governmental action that interferes with broadly-defined
property rights . . . crosses the line from valid regulation to a compensable taking,
and it is fair to say that no one has come up with a fully satisfactory means of
drawing this line’.37 This lack of a clear line between valid regulation and illegal
indirect expropriation may lead governments to use their regulatory power more
aggressively against foreign investments than they would otherwise, when they
deem it in the public interest.
Because of these factors, cases alleging indirect expropriations have become
increasingly important in recent years and instances of direct expropriations have
become less frequent. An indirect expropriation leaves the investor’s title untouched
but significantly reduces an investor’s ability to utilize or benefit from the invest-
ment. A typical feature of indirect expropriation is that the state denies the very
existence of an expropriation and justifies its actions as a legitimate exercise of its
regulatory or ‘police powers’, thereby rejecting the investor’s claim of compensa-
tion.38 In many cases, aggrieved investors will allege that a governmental action
negatively affecting their investment is both an indirect expropriation and a vio-
lation of the fair and equitable treatment standard discussed in Chapter 10. For
example, in arbitral decisions arising from the Argentine economic crisis at the
beginning of the twenty-first century, tribunals found that governmental actions
did not constitute an expropriation but did deny the investor fair and equitable
treatment.39
In determining whether a regulatory action by a host state constitutes an indi-
rect expropriation, tribunals look primarily to its effect on the investment rather
than to the form of the state action or the intent of the government in making it.
Thus, in the Energy Charter case of Nykomb Synergetics Technology Holding AB v
Latvia, the claimant argued that the Latvian government’s refusal to pay a double
tariff, as was allegedly promised, constituted an ‘indirect’ or ‘creeping’ expropria-
tion under Article 13(1), asserting that the denial of such a substantial part of
the project’s expected income made the enterprise economically unviable and the
investment worthless. In that case, the tribunal said:

37 Feldman v Mexico, ICSID Case No ARB(AF)/99/1 (Award on Merits) (16 December

2002) ¶ 100.
38 Dolzer and Schreuer (n 9 above) 92.
39 eg LG&E v Argentine Republic, ICSID Case No ARB/02/1 (Decision on Liability) (3 October
2006); CMS Gas Transmission Co v The Argentine Republic, ICSID Case No ARB/01/8 (Award)
(12 May 2005); Sempra Energy International v The Argentine Republic, ICSID Case No ARB/02/16
(Award) (28 September 2007).
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regulatory takings may under the circumstances amount to expropriation or the equiva-
lent of an expropriation. The decisive factor for drawing the border line towards expropria-
tion must primarily be the degree of possession taking or control over the enterprise the
disputed measures entail. In the present case, there is no possession taking of Windau or
its assets, no interference with the shareholder’s rights or with the management’s control
over and running of the enterprise—apart from ordinary regulatory provisions laid down
in the production license, the off-take agreement, etc.40
Thus, despite the fact that a regulatory act may have a negative effect on an
investment, expropriation will not be found if the investor retains control of the
investment.
As numerous cases have indicated, in evaluating a claim of expropriation it is
important to recognize a state’s legitimate right to regulate and exercise its police
power in the interests of public welfare. Such actions should not be confused
with acts of expropriation. The American Law Institute’s Restatement (Third) of the
Foreign Relations Law of the United States underscores this point when it states that
‘a state is not responsible for loss of property or for other economic disadvantage
resulting from bone fide general taxation, regulation, forfeiture for crime, or other
action that is commonly accepted as within the police power of states, if it is not
discriminatory’.41

12.6 Governmental Actions Equivalent

or Tantamount to Expropriation

Some investment treaties appear to recognize a third category of expropriatory

acts: acts that are tantamount to or equivalent in effect to an expropriation or
nationalization. The precise differentiation between this category and the cat-
egory of indirect expropriations is ephemeral at best, and tribunals have struggled
to articulate a meaningful distinction.
Two views towards this category seem to have emerged. One is that the category
is somehow broader and more expansive than simple ‘indirect expropriations’.
Thus, the tribunal in the Waste Management case pointed out that Article 1110(1)
of NAFTA distinguished between direct or indirect expropriation, on the one
hand, and measures tantamount to an expropriation, on the other. It stated that
an indirect expropriation was still a taking of property, but a measure tantamount
to an expropriation might involve no actual transfer, taking, or loss of property by
any person or entity. It might only require ‘an effect on property which makes for-
mal distinctions of ownership irrelevant’. It argued that the phrase ‘take a measure
tantamount to nationalization or expropriation of such an investment’ in Article

40 Nykomb Synergetics Technology Holding AB v Latvia, SCC 118/2001 (Award) (16 December
2003) ¶ 4.3.1.
41 American Law Institute, Restatement of the Law (Third), The Foreign Relations Law of the
United States (3rd edn, 1987) vol 1, § 712, Committee g.
328 Protection Against Expropriation
1110(1) was intended to add to the meaning of the prohibition, over and above the

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reference to indirect expropriation and so to broaden it.42
On the other hand, one may also view the concept of ‘measures equivalent
to expropriation’ as simply stating that the concept is co-extensive with that of
expropriation or indirect expropriation. Thus, the tribunal in Pope & Talbot inter-
preted ‘a measure tantamount to nationalization or expropriation’ as referring
simply to indirect expropriation. In the tribunal’s opinion, the expression ‘a meas-
ure tantamount to nationalization or expropriation’ means nothing more than ‘a
measure equivalent to nationalization or expropriation’. It therefore rejected the
argument that measures tantamount to expropriation can encompass less severe
government acts than expropriation itself because ‘something that is equivalent to
something else cannot logically encompass more . . . . Thus, measures are covered
only if they achieve the same result as expropriation’.43 In the NAFTA Metalclad
case, the tribunal stated that expropriation under Article 1110:
includes 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.44
In practice, the distinction between indirect expropriations and measures
equivalent to expropriations does not appear to be a meaningful one. No case
has yet identified a measure that was tantamount to an indirect expropriation but
not itself an indirect expropriation. The more important and more challenging
distinction for arbitral tribunals is the distinction between legitimate regulatory
acts and regulatory actions that amount to an indirect expropriation or that have
effects equal or tantamount to an expropriation.

12.7 Types of Government Measures

that May Constitute Indirect Expropriation

As illustrated by the decisions of arbitral tribunals, investors have sought with

mixed success to challenge the following types of host government measures as
expropriation: (1) disproportionate tax increases; (2) interference with contract
rights; (3) interference with the management of an investment; and (4) revocation
or denial of government permits or licences. Each of these types of measures is
now examined briefly.

42 Waste Management, Inc v United Mexican States (No 2), ICSID Case No ARB(AF)/00/3 (Final
Award) (30 April 2004) ¶¶ 143–144.
43 Pope & Talbot Inc v The Government of Canada, UNCITRAL (Interim Award) (26 June
2000) ¶¶ 96, 104.
44 Metalclad Corp v Mexico, ICSID Case No ARB(AF)/97/1 (Award) (30 August 2000) ¶ 103.
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(a) Disproportionate tax increases
Host countries may use their power to levy taxes as a means to limit and even
curtail the activities of foreign investors and investments. While taxation, even
if onerous, may be a legitimate means of raising public revenue, it is possible for
taxes to be so high that they are confiscatory and constitute expropriation. Revere
Copper v OPIC45 arose out of a concession contract with the Jamaican government
that contained a stabilization clause concerning taxes and other financial burdens.
Subsequently, in violation of contractual obligations, the government drastically
increased the taxes and royalties on Revere Copper to the point that its invest-
ments became economically unviable. Revere thereafter sought to recover com-
pensation from the US Overseas Private Investment Corporation (OPIC) because
OPIC’s political risk insurance policy provided coverage against ‘expropriatory
action’. OPIC refused the request on the grounds that Revere Copper continued
to have all the property rights it had had before the tax increase. Revere then insti-
tuted arbitral proceedings, as was permitted by its insurance policy. The tribunal,
by a vote of 2 to 1, rejected OPIC’s argument, but with a lengthy and vigorous dis-
senting opinion. The majority based its decision on the grounds that the Jamaican
government’s repudiation of its commitments had rendered the investor’s control,
use, and operation of its properties no longer effective.46
The Revere Copper case did not arise under an investment treaty and was not
an example of investor–state arbitration. Nonetheless, its conclusion does sup-
port the proposition that a drastic tax increase, particularly when it violates a
pre-existing government agreement, can amount to expropriation. This under-
standing accords with the approach taken by the tribunal in Link-Trading Joint
Stock Co v Moldova,47 a case that arose out of the US–Moldova BIT. The tribunal
there stated:
As a general matter, fiscal measures only become expropriatory when they are found to be
an abusive taking. Abuse arises where it is demonstrated that the State has acted unfairly
or inequitably towards the investment, where it has adopted measures that are arbitrary or
discriminatory in character or in their manner of implementation, or where the measures
taken violate an obligation undertaken by the State in regard to the investment.48
Two other investor–state cases based on treaty provisions also raised the issue
of whether an increase in taxes can constitute an expropriation. Both cases were
brought against Ecuador. EnCana Corporation v Republic of Ecuador49 and

45 Re Revere Copper and Brass Inc v Overseas Private Investment Corp (Award) (24 August
1978) (1978) 17 ILM 1321.
46 ibid 1348–53.
47 Link-Trading Joint Stock Co v Department for Customs Control of the Republic of Moldova,
UNCITRAL (Final Award) (18 April 2002). See also Burlington Resources, Inc v Republic of Ecuador,
ICSID Case No ARB/08/5 (Decision on Liability) (14 December 2012) ¶ 393, which found that
customary international law limits the power to tax in two ways: taxes may not be discriminatory
and they may not be confiscatory.
48 ibid ¶ 64.
49 EnCana Corp v Republic of Ecuador, LCIA Case No UN3481 (Award) (3 February 2006).
330 Protection Against Expropriation
Occidental Exploration and Production Company v The Republic of Ecuador50 each

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alleged indirect expropriation through taxation. At issue were the claimants’ right
to value-added tax (VAT) refunds to which they believed themselves entitled
under the law at the time of investment and Ecuador’s right to issue interpreta-
tive rulings retroactively excluding petroleum companies from such refunds. In
EnCana, the tribunal rejected the indirect expropriation claim on the ground
that, despite the denial of VAT refunds, the companies continued to operate prof-
itably. It stated that ‘in the absence of a specific commitment from the host state,
the foreign investor has neither the rights nor any legitimate expectations that
the tax regime will not change, perhaps to its disadvantage, during the period of
investment’. It added that ‘only if a tax is extraordinary, punitive in amount or
arbitrary in its incidence would issues of indirect expropriation be raised’.51 The
tribunal recognized that a law cancelling a state’s accrued liability to an investor
might amount to direct expropriation, but it rejected the investors’ direct expro-
priation claim on the grounds that Ecuador’s refusal to refund VAT payments was
not ‘merely willful’ and that independent national courts were available to the
investors.52 In Occidental, the tribunal dismissed the expropriation claims on the
ground that the measure did not affect a substantial portion of the investment.53
Based on the foregoing, one must conclude that since taxation falls within a
state’s normal police power, for a tax measure to constitute indirect expropriation
it would need to be extraordinarily excessive and arbitrary and to violate an exist-
ing agreement with the investor.

(b) Interference with contractual rights

Many governmental actions taken for public policy reasons can negatively affect
an investor’s contractual rights. As indicated earlier in the chapter, international
law protects contract rights from expropriation, and investment treaties have
sought to broaden and deepen that protection significantly. On the basis of such
treaty provisions, investors have brought arbitral claims against host countries
with varying degrees of success by claiming that government measures affected
their contractual rights to the point that they constituted expropriation.
In CME v Czech Republic, an investor–state dispute based on the
Netherlands–Czech Republic BIT, the investor complained about interference
with its contractual rights by a government-established regulatory authority,
the Media Council. It argued that such interference undermined the contractu-
ally guaranteed licence of the local partner of the investor, which was crucial
for the investment project because of its exclusivity. The tribunal found that the

50 Occidental Exploration and Production Co v The Republic of Ecuador, LCIA Case No UN3467
(Award) (1 July 2004).
51 EnCana Corp v Republic of Ecuador, LCIA Case No UN3481 (Award) (3 February 2006) ¶¶
173, 177.
52 ibid ¶ 194.
53 Occidental Exploration and Production Co v The Republic of Ecuador, LCIA Case No UN3467
(Award) (1 July 2004) ¶ 89.
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regulatory authority had breached the treaty’s provision against indirect expro-
priation by reversing its earlier position and forcing the investor to accept the
amendments to the contract. This act resulted in a loss of legal security.54 The
tribunal found irrelevant the respondent’s view that the Media Council’s actions
did not deprive the investor of value because there had been no physical taking of
property by the state and because the original licence always had been held by the
original licensee and kept untouched. It found that ‘what was touched and indeed
destroyed was the investor’s investment and the commercial value of the invest-
ment by reason of coercion exerted by the Media Council’.55 It should be noted,
however, that in Lauder v Czech Republic, a different tribunal deciding the same
set of facts under a different BIT, came to the opposite conclusion. It found that
the respondent state ‘did not take any measure of, or tantamount to, expropriation
of the Claimant’s property rights within any of the time periods, since there was
no direct or indirect interference by the Czech Republic in the use of Mr. Lauder’s
property or with the enjoyment of its benefits’.56 Moreover, it pointed to the fact
that there was no evidence that any measure of the Czech government transferred,
deprived, or interfered with the claimant’s property rights.57
Not every failure by a government to perform a contract amounts to an expro-
priation, even if the violation leads to a loss of contractual rights. A simple con-
tractual breach by a state is not an expropriation.58 Tribunals have found that a
determining factor is whether the state acted in an official, governmental capac-
ity.59 In Siemens v Argentina, the tribunal observed that a host state party breach-
ing a contract only breaches the applicable treaty if the behaviour goes beyond
what an ordinary contracting party could adopt.60 It stated:
for the State to incur international responsibility it must act as such, it must use its public
authority. The actions of the State have to be based on its superior governmental power.
It is not a matter of disappointment in the performance of the State in the execution
of a contract but rather of interference in the contract execution through governmental
actions.61

54 CME Czech Republic BV v Czech Republic, UNCITRAL (Partial Award) (13 September
2001) ¶¶ 591–609.
55 ibid ¶ 591.
56 Ronald S Lauder v Czech Republic, UNCITRAL (Final Award) (3 September 2001), ¶ 201.
57 ibid ¶ 202.
58 SM Schwebel, ‘On Whether a Breach by a State of a Contract with an Alien is a Breach of
International Law’ in International Law at the Time of its Codification, Essays in Honor of Roberto
Ago, III (Guiffrè, 1987) 401.
59 Impregilo SpA v Islamic Republic of Pakistan, ICSID Case No ARB/03/3 (Decision
on Jurisdiction) (22 April 2005) ¶ 281; Bayindir Insaat Turizm Ticaret Ve Sanayi AS v Islamic
Republic of Pakistan, ICSID Case No ARB/03/29 (Decision on Jurisdiction) (14 November
2005) ¶ 257; Azurix v Argentine Republic, ICSID Case No ARB/01/12 (Award) (14 July 2006) ¶
315; Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No ARB/05/8 (Award) (11
September 2007) ¶ 443; Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, ICSID Case
No ARB/05/22 (Award) (24 July 2008) ¶ 458.
60 Siemens v Argentina, ICSID Case No ARB/02/8 (Award) (6 February 2007) ¶ 248.
61 ibid ¶ 253.
332 Protection Against Expropriation
In the NAFTA case of Waste Management, the tribunal adopted a similar

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position:
The mere non-performance of contractual obligations is not to be equated with a taking
of property, nor (unless accompanied by other elements) is it tantamount to expropriation.
Any private party can fail to perform its contracts, whereas nationalization and expro-
priation are inherently governmental acts . . . . The tribunal concludes that it is one thing
to expropriate a right under a contract and another to fail to comply with the contract.
Non-compliance by the government with contractual obligations is not the same thing as,
or equivalent or tantamount to, an expropriation.62
Despite the guidance offered by this jurisprudence, determining when a state
is invoking its governmental powers with respect to a contract and when it is
engaged in simple non-performance is not always easy, clear, or self-evident.

(c) Unjustified interference with the management of the investment

An indirect expropriation may also take place as a result of governmental meas-
ures that significantly interfere with or entirely remove an investor’s actual man-
agement control over an investment. This can occur when an investor is physically
or legally impeded from its management tasks or when investor-controlled man-
agement is replaced with government-appointed management. Such interference
may constitute an indirect expropriation alone or in conjunction with other acts
or omissions that effectively deprive an investor of its property rights. The crucial
element in such a determination is the degree or magnitude of the interference
resulting from such conduct.
An example of such interference occurred in Biloune v Ghana, which con-
cerned an investment project to build a restaurant complex through the inves-
tor’s local subsidiary, MDCL. The project was substantially under way when
local governmental authorities issued a stop work order and arrested and expelled
the investor. The tribunal noted that given the central role of Mr Biloune in
promoting, financing, and managing MDCL, his expulsion from the country
effectively prevented MDCL from pursuing its project and, therefore, consti-
tuted an indirect expropriation of MDCL’s contractual rights in the project and
consequently an indirect expropriation of the value of Mr Biloune’s interest in
MDCL.63
In Benvenuti & Bonfant, the tribunal concluded that the cumulative effect of a
series of governmental acts and omissions amounted to a de facto expropriation.
These acts and omissions included interference with the marketing of the inves-
tors’ products by fixing sales prices, dissolving a marketing company, instituting
criminal proceedings against the investor who then left the country, and finally

62 Waste Management, Inc v United Mexican States (II), ICSID Case No ARB(AF)/00/3 (Final
Award) (30 April 2004) ¶¶ 184–185.
63 Biloune and Marine Drive Complex Ltd v Ghana Investments Centre and the Government of
Ghana, UNCITRAL (Award on Jurisdiction and Liability) (27 October 1989).
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the physical takeover of the investors’ premises.64 Thus, the host state’s measures
may amount to an expropriation when they are directed against an investor who
is crucial for the profitable management and operation of the investment.
Although they did not involve investment treaties, two Iran–US claims tri-
bunal cases, Starrett Housing Corporation v Government of the Islamic Republic
of Iran65 and Tippetts, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting
Engineers of Iran,66 also found expropriations as a result of the Iranian
Revolutionary government’s appointment of new managers of investments
owned by US nationals.

(d) Revocation or denial of government permits or licences

Several cases have found that a government’s revocation of approved licences or
permits constitutes an expropriation. The cases of Goetz and Middle East Cement
involved investment disputes in which a government’s revocation of an investor’s
free zone benefits was determined to have an effect similar to expropriation. In
Goetz, Burundi revoked the investor’s free zone status without any formal tak-
ing of property. Applying the Belgium-Luxembourg Economic Union–Burundi
BIT, the tribunal held that ‘the government’s actions fell within the concept of
measures having the effect similar to expropriation, ie they constituted indirect
expropriation’. It also stated:
Since . . . the revocation by the Minister for Industry and Commerce of the free zone cer-
tificate forced [the investors] to halt all activities . . . which deprived their investments of all
utility and deprived the claimant investors of the benefit which they could have expected
from their investments, the disputed decision can be regarded as a ‘measure having similar
effect’ to a measure depriving of or restricting property within the meaning of Article 4
of the Investment Treaty.67
Middle East Cement concerned the revocation of a free zone licence by the
Egyptian government when it prohibited importation of cement. The tribunal
found that the investor had been deprived of the use and benefit of its invest-
ment even though it retained the nominal ownership of its rights. It therefore
concluded that Egypt had breached the Egypt–Greece BIT’s clause prohibiting
measures whose effects are tantamount to expropriation.68
Governmental permits are essential for businesses to operate in many eco-
nomic areas. The revocation or non-renewal of permits by the government can
in some circumstances amount to an indirect expropriation even though the

64 Benvenuti & Bonfant v Congo, ICSID Case No ARB/77/2 (Award) (8 August 1980).
65 Starrett Housing Corp v Government of the Islamic Republic of Iran (19 December 1983) 4
Iran-USCTR 122, 154.
66 Tippetts, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting Engineers of Iran (29 June
1984) 6 Iran-USCTR 219, 225.
67 Goetz and Ors v Republic of Burundi, ICSID Case No ARB/95/3 (Award) (2 September
1998) ¶ 124.
68 Middle East Cement Shipping and Handling Co SA v Arab Republic of Egypt, ICSID Case No
ARB/99/6 (Award) (12 April 2002) ¶ 107.
334 Protection Against Expropriation
investor retains full ownership and control of business assets. For example,

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in Técnicas Medioambientales Tecmed SA v The United Mexican States,69 the
claimant, a Spanish company, purchased a hazardous waste landfill from a
Mexican government agency in 1995 and operated it under an annually renew-
able authorization. When the agency of the Mexican government charged with
enforcing environmental policy adopted a resolution refusing to renew the
authorization and ordering the landfill to be closed, the claimant instituted
arbitration against Mexico on grounds that the agency’s actions amounted to
indirect expropriation under the Mexico–Spain BIT. The tribunal, focusing on
the effects of such action, concluded that the agency’s action was equivalent to
an expropriation.70
The NAFTA case of Metalclad Corporation v The United Mexican States71 also
dealt with the refusal to issue a permit for a landfill in Mexico. In that case,
the Mexican federal government specifically assured the investor that its landfill
project complied with all the relevant environmental and planning regulations;
however, in response to local opposition and without legal authority, the munici-
pality of Guadalcazar denied the project a construction permit. The arbitral tri-
bunal determined that the denial, as well as a subsequent action by the governor
declaring the land in question a protected area because it was the site of a rare
cactus, constituted indirect expropriation of the investor’s investment. The tribu-
nal stated:
by permitting or tolerating the conduct of Guadalcazar in relation to Metalclad which has
already been found to amount to unfair and inequitable treatment breaching Article 1105
and by thus participating or acquiescing in the denial to Metalclad of the right to operate
the landfill, notwithstanding the fact that the project was fully approved and endorsed
by the federal government, Mexico must be held to have taken a measure tantamount to
expropriation in violation of NAFTA Article 1110(1).72
The cited cases illustrate some of the circumstances that give rise to indirect
expropriations by host state regulatory measures. In each case, the respondents
stated in defence that their action was an exercise of their police powers and nec-
essary to protect the public welfare. The question, as many arbitral tribunals have
stated, is: Where should the line be drawn between an indirect expropriation
that entails the international responsibility to compensate for the inflicted dam-
ages and a non-compensable regulatory measure? No definitive answer exists.
However, arbitrators and scholars have pointed to certain criteria that may be
useful in determining that elusive dividing line.

69 Técnicas Medioambientales Tecmed SA v The United Mexican States, ICSID Case No ARB(AF)
00/2 (Award) (29 May 2003).
70 ibid ¶ 151.
71 Metalclad Corp v The United Mexican States, ICSID Case No ARB(AF)/97/1 (Award) (3
August 2000).
72 ibid ¶ 128.
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12.8 Criteria for Distinguishing Indirect Expropriation
from Legitimate Regulation

In applying the expropriation clauses to modern concrete situations, most

contemporary arbitral tribunals have struggled to define the precise boundary
between legitimate host country regulation and illegitimate regulatory takings.
In its summary of expropriation jurisprudence under NAFTA, the tribunal
in Fireman’s Fund Insurance Company v United Mexican States73 listed the fol-
lowing factors as relevant: (1) whether the measure is within the recognized
police powers of the host state; (2) the public purpose and effect of the measure;
(3) whether the measure is discriminatory; (4) the proportionality between the
means employed and the aim sought to be realized; and (5) the bona fide nature
of the measure. It also stated that the investor’s reasonable ‘investment-backed
expectations’ may be a relevant factor in determining whether an indirect
expropriation occurred. While these elements constitute a useful framework
for evaluating whether a specific governmental measure constitutes a regulatory
taking or an indirect expropriation, their application to specific cases is by no
means easy or automatic.
Although the texts of investment treaties do not ordinarily provide guid-
ance on how to distinguish between indirect expropriation and legitimate
regulation, an examination of arbitral jurisprudence on this question does
provide some illumination. As a group, relevant arbitral decisions point to a
number of criteria that may be helpful in drawing a line between a compen-
sable indirect expropriation and non-compensable regulatory measures. These
include: (1) the degree of intensity of interference with investor property rights;
(2) the frustration of investors’ legitimate expectations; (3) lack of proportional-
ity; (4) non-transparency, arbitrariness, and discrimination; and (5) the effects
and purpose of the measure.

(a) Degree of interference with investor property rights

The purpose of expropriation provisions in treaties is to protect investors’ property
rights. Therefore, the greater the interference with those rights by governmental
regulatory measures, the more likely it is that a tribunal will find an indirect
expropriation. Two factors in particular are relevant in evaluating the magnitude
of a host government’s interference through a regulatory measure with an inves-
tor’s property rights: (1) the severity of its economic impact and effect on the
investor’s control over the investments; and (2) the duration of the regulatory
measure.

73 Fireman’s Fund Insurance Co v United Mexican States, ICSID Case No ARB(AF)/02/1 (Award)
(17 July 2006) ¶ 176.
336 Protection Against Expropriation

(i) Severity of economic impact and loss of effective control

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International tribunals treat the severity of the economic impact caused by a reg-
ulatory measure as an important element in determining whether the measure
constitutes an expropriation requiring compensation. One question often asked
is whether the measure in question resulted in ‘substantial deprivation’ of the
investment or its economic benefits. Thus, the tribunal in Occidental v Ecuador,74
discussed earlier in this chapter, had to consider whether Ecuador’s refusal to
refund to Occidental VAT to which the state was entitled to under Ecuadorian
law constituted a measure tantamount to an expropriation. It concluded that the
measure in question did not constitute indirect expropriation because ‘the crite-
rion of “substantial deprivation” was not present in that case, since in fact, there
has been no deprivation of the use of the investment, let alone measures affecting
a significant part of the investment’.75
Tribunals have also applied the test of substantial deprivation in cases challeng-
ing measures taken by Argentina to deal with the severe financial and economic
crisis it experienced in 2001–02.76 For example, in CMS v Argentina, the claim-
ant, an investor in a gas transportation company, alleged that Argentina’s decision
to suspend a tariff adjustment formula for gas transportation during the crisis
constituted an indirect expropriation. In evaluating this claim, the tribunal, after
reviewing the relevant arbitral jurisprudence, stated that ‘the essential question is
to establish whether the enjoyment of the property has been effectively neutral-
ized’ because ‘the standard . . . where indirect expropriation is contended is that
of substantial deprivation’.77 Although the tribunal recognized that the measures
under dispute had an important effect on the investor’s business, it found no
substantial deprivation and thus no breach of the expropriation provision of the
Argentina–US BIT. It also noted that ‘the investor is in control of the investment;
the government does not manage the day-to-day operations of the company; and
the investor has full ownership and control of the investment’.78
Similarly, in LG&E v Argentina,79 which also arose out of the Argentine crisis,
the investors brought indirect expropriation claims when the value of their licences
was reduced by more than 90 per cent as a result of Argentina’s abrogation of the
principal guarantees of the tariff system. The tribunal observed that in order to
establish whether state measures constitute expropriation under the relevant BIT
expropriation clause, one ‘must balance two competing interests: the degree of the

74 Occidental Exploration and Production Co v The Republic of Ecuador, LCIA Case No UN3467
(Final Award) (1 July 2004).
75 ibid ¶ 89.
76 See BG Group plc v The Republic of Argentina, UNCITRAL (Final Award) (24 December
2007) ¶ 271; El Paso Energy International Co v The Argentine Republic, ICSID Case No ARB/03/15
(Award) (31 October 2011) ¶ 256.
77 CMS Gas Transmission Co v The Argentine Republic, ICSID Case No ARB/01/8 (Award) (12
May 2005) ¶ 262.
78 ibid ¶ 263.
79 LG&E Energy Corp, LG&E Capital Corp, LG&E International INC v Argentine Republic,
ICSID Case No ARB/02/1 (Decision on Liability) (3 October 2006).
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measure’s interference with the right of ownership and the power of the State to adopt
its policies’.80 According to the tribunal, an evaluation of the measure’s interference
with the investor’s right of ownership must take into account the measure’s economic
impact—its interference with the investor’s reasonable expectations—and the meas-
ure’s duration.81 In considering the severity of the economic impact, ‘the analysis
must focus on whether the economic impact unleashed by the measure adopted by
the host State was sufficiently severe as to generate the need for compensation due to
expropriation’.82 The tribunal noted that sufficient interference with the investment’s
ability to carry on its business does not meet this standard when the investment
continues to operate, even if profits are diminished. It held that ‘the impact must be
substantial in order that compensation may be claimed for the expropriation’.83 In
the circumstances of that case, the tribunal found that, although Argentina adopted
severe measures that undoubtedly had an impact on the investment’s expected earn-
ings, the measures did not deprive the investors of the right to enjoy their investment,
nor did they lose control of their shares in its licensees, even though the value of the
shares may have fluctuated during the economic crisis. The tribunal also found rel-
evant that the investor was able to direct the day-to-day operations of the licensees in
a manner similar to what had been possible before the measures were implemented;
consequently, it rejected the claims of indirect expropriation.
Several NAFTA cases have also considered the severity of the economic impact
of a challenged state measure to determine whether an indirect expropriation
occurred.84 In addition, the first case to be decided under the ECT also dealt with
the issue. In Nykomb Synergetics Technology Holding AB v Latvia85 the investor
contended that the non-payment of an allegedly promised double tariff by Latvia
constituted an indirect expropriation, since the non-payment resulted in a sub-
stantial loss of sales income and made the enterprise economically unviable. The
tribunal, like others concerned with drawing the line between legitimate regula-
tion and illegal indirect expropriation, acknowledged that under certain circum-
stances regulatory measures may be equivalent to expropriation. ‘[T]‌he decisive
factor for drawing the borderline towards expropriation must primarily be the
degree of possession taking or control over the enterprise the disputed measures
entail.’86 Since Latvia did not take possession of the investor or its assets and
did not interfere with shareholders’ rights or with management’s control of the
enterprise—apart from ordinary regulatory provisions—the tribunal concluded
that the challenged governmental measures were not equivalent to expropriation.87

80 ibid ¶ 189. 81 ibid ¶ 190. 82 ibid ¶ 191. 83 ibid ¶ 194.

84 eg SD Myers, Inc v Canada, UNCITRAL (First Partial Award) (13 November 2000); Pope
& Talbot Inc v The Government of Canada, UNCITRAL (Interim Award) (26 June 2000); GAMI
Investments, Inc v Mexico, UNCITRAL (Final Award) (15 November 2004).
85 Nykomb Synergetics Technology Holding AB v Latvia, SCC 118/2001 (Award) (16
December 2003).
86 ibid ¶ 4.3.1.
87 See also Generation Ukraine, Inc v Ukraine, ICSID Case No ARB/00/9 (Award) (16 September
2003), in which the tribunal, applying the US–Ukraine BIT, concluded that the failure of the Kyiv
City State Administration to provide lease agreements for a construction project of an office build-
ing did not amount to an expropriation because the respondent’s conduct ‘did not come close to
338 Protection Against Expropriation
However, the arbitral tribunal in Revere Copper, discussed previously, found an

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expropriation by looking at the impact of the regulation on effective control over
the use and operation of the investor’s property.88 Although formal ownership was
not affected by the governmental measures, the tribunal found that the investor’s
control, use, and operation of its investments were no longer ‘effective’.

(ii) Duration of the governmental measure

The duration of the challenged measure is another element considered in deciding
whether it is tantamount to an expropriation. In SD Myers, the NAFTA tribu-
nal reinforced the distinction between indirect expropriation and regulation by
observing that ‘an expropriation usually amounts to a lasting removal of the abil-
ity of an owner to make use of its economic rights’, although it did acknowledge
that in some contexts even a partial or temporary deprivation could amount to
expropriation.89 In that case, the tribunal did not find the temporary export ban
on certain hazardous waste to amount to expropriation because it lasted only a
short time.
Similarly, the tribunal in LG&E held that in evaluating the degree of the inter-
ference with the investor’s right of ownership one should analyse not only the
measure’s economic impact but also ‘the duration of the measure as it relates to
the degree of interference with the investor’s ownership rights’.90 The tribunal
observed that ‘generally, the expropriation must be permanent, that is to say, it
cannot have a temporary nature unless the investment’s successful development
depends on the realization of certain activities at specific moments that may not
endure variations’.91 In that case, the effect of Argentina’s regulatory measures
on the value of the investments in question was not found to be permanent.
Therefore, the tribunal concluded that ‘without a permanent, severe deprivation
of LG&E’s rights with regard to its investment, or almost complete deprivation of
the value of LG&E’s investment’92 Argentina’s challenged measure could not be
held as equivalent to expropriation.
The tribunals in the Tecmed and Generation Ukraine cases also considered the
temporal quality of the challenged regulatory measure to be important in assess-
ing the degree of its interference with the investor’s property rights. The former
held that measures adopted by a state constitute an indirect expropriation if they
are, among other things, irreversible and permanent.93 The latter found that the

creating a persistent or irreparable obstacle to the investor’s use, enjoyment, or disposal of its invest-
ments’. ibid ¶ 20.32.
88 Re Revere Copper and Brass, Inc v Overseas Private Investment Corp (Award) (24 August
1978) (1978) 17 ILM 1321.
89 SD Myers, Inc v Canada, UNCITRAL (First Partial Award) (13 November 2000) ¶ 283.
90 LG&E Energy Corp, LG&E Capital Corp, LG&E International INC v Argentine Republic,
ICSID Case No ARB/02/1 (Decision on Liability) (3 October 2006) ¶ 190.
91 ibid ¶ 194. 92 ibid ¶ 200.
93 Técnicas Medioambientales Tecmed SA v The United Mexican States, ICSID Case No ARB(AF)
00/2 (Award) (29 May 2003) ¶ 116.
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challenged regulatory measure ‘did not come close to creating a persistent or irrep-
arable obstacle to the Claimant’s use, enjoyment or disposal of its investment’.94
Thus, the severity of the economic impact is a crucial test in determining
whether a regulatory measure gives rise to indirect expropriation. Arbitral juris-
prudence provides broad support for the proposition that to constitute an expro-
priation, a challenged measure has to interfere with an investment to the point
that it deprives the investor of his or her fundamental rights of ownership, use,
enjoyment, or management in a permanent or persistent way.

(b) Frustration of the investor’s legitimate expectations

The concept of the investor’s legitimate expectations, discussed in Chapter 9 with
respect to fair and equitable treatment, has been acknowledged in international
jurisprudence95 as important in protecting investors’ property rights. A host
state’s frustration of such expectations may play a crucial role in finding a breach
of the fair and equitable treatment standard and also in a determination of indi-
rect expropriation.96
Foreign investors invest not only to acquire assets but also to achieve partic-
ular economic benefits that they reasonably expect to derive from such assets.
Most governments, through their laws and representations to the investors, often
encourage and sometimes create these expectations. Government statements,
whether expressed in advertisements, during promotional ‘road shows’, or during
direct negotiations with specific foreign investors, may also create expectations
upon which investors rely in making investment decisions. Consequently, a host
country’s failure to honour its assurances may adversely affect investors’ reasonably
expected economic benefits and so is a factor in judging whether a measure consti-
tutes indirect expropriation. Thus, in Metalclad v Mexico, the tribunal found that
‘Metalclad was led to believe, and did in fact believe, that federal and state permits
allowed for the construction and operation of the landfill’,97 and as a result it was

94 Generation Ukraine, Inc v Ukraine, ICSID Case No ARB/00/9 (Award) (16 September
2003) ¶ 20.32.
95 Kuwait v American Independent Oil Co (Final Award) (24 March 1982) (1982) 21 ILM 976,
1034; Metalclad Corp v The United Mexican States, ICSID Case No ARB(AF)/97/1 (Award) (3
August 2000) ¶ 99; International Thunderbird Gaming Corp v United Mexican States, UNCITRAL
(Award) (26 January 2006) ¶ 147; INA Corp v Iran (1985) 8 Iran-USCTR 373, 385 (Lagergren,
J, separate opinion); National & Provincial Building Society v United Kingdom, ECHR App Nos
21319/93, 21449/93, 21675/93 (Judgment) (23 October 1997) Reports 1997-VII, 2325, 2347–50;
Prince Hans-Adam II of Liechtenstein v Germany, ECHR App No 42527/98 (Judgment) (12 July
2001) 83.
96 See, however, the tribunal in El Paso v Argentina, which determined that because ‘[t]‌here
is not always a clear distinction between indirect expropriation and violation of legitimate expecta-
tions . . . the violation of a legitimate expectation should rather be protected by the fair and equitable
treatment standard’. El Paso Energy International Co v The Argentine Republic, ICSID Case No
ARB/03/15 (Award) (31 October 2011) ¶ 227. This approach could not apply if the treaty expressly
included investor expectations within the indirect expropriation standard.
97 Metalclad Corp v The United Mexican States, ICSID Case No ARB(AF)/97/1 (Award) (3
August 2000) ¶ 100.
340 Protection Against Expropriation
led to rely on ‘the reasonably-to-be-expected economic benefit’.98 Consequently,

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its inability to carry out the investment project frustrated those expectations and
so constituted an additional factor in finding that the governmental measures
were tantamount to expropriation. Similarly, when asking whether the revocation
of a permit amounted to an expropriation, the tribunal in Tecmed also referred to
the legitimate expectations of the investor. It stated that ‘even before the investor
made its investment, it was widely known that it expected its investments in the
project to last for a long term and that it took this into account to estimate the
time and business required to recover such investment and obtain the expected
return upon making its tender offer for the acquisition of the assets related to that
investment project’.99 Therefore, as the tribunal stressed, ‘the Mexican govern-
mental authorities could not be unaware of that and of the need to act in line with
such legitimate expectations to avoid rendering unfeasible any private investment
of the scale required to confine hazardous waste in the United Mexican States
under acceptable technical operating conditions’. Investor expectations, accord-
ing to the tribunal, ‘should be considered legitimate and should be evaluated in
light of the Agreement and of international law when ascertaining whether the
host state’s actions violate the investment treaty that accords protection against
measures equivalent to an expropriation’.100
In response to the growing number of arbitral claims challenging regulatory meas-
ures as indirect expropriations, and the difficulty in judging them against traditional
treaty provisions, some recent treaties have sought to provide more detailed guid-
ance regarding the factors to be considered in determining whether a measure vio-
lates expropriation clauses. Examples of such treaties include various US free trade
agreements (FTAs),101 the Malaysia-Australia FTA,102 recent Canadian BITs,103

98 ibid ¶ 103.
99 Tecnicas Medioambientales Tecmed SA v The United Mexican States, ICSID Case No ARB(AF)
00/2 (Award) (29 May 2003) ¶ 149.
100 ibid ¶ 150.
101 US–Singapore Free Trade Agreement (6 May 2003); US–Chile Free Trade Agreement (6 June
2003).US–Australia Free Trade Agreement (18 May 2004); US–Morocco Free Trade Agreement
(15 June 2004).
102 Malaysia–Australia Free Trade Agreement (22 May 2012).
103 Agreement between Canada and the Republic of Peru for the Promotion and Protection
of Investments (14 November 2006); Agreement between the Government of Canada and the
Government of the Republic of Latvia for the Promotion and Protection of Investments (5 May
2009); Agreement between Canada and the Czech Republic for the Promotion and Protection of
Investments (6 May 2009); Agreement between the Government of Canada and the Government
of Romania for the Promotion and Reciprocal Protection of Investments (8 May 2009); Agreement
between Canada and the Hashemite Kingdom of Jordan for the Promotion and Protection
of Investments (28 June 2009); Agreement between Canada and the Slovak Republic for the
Promotion and Protection of Investments (20 July 2010); Agreement between the Government of
Canada and the Government of the People’s Republic of China for the Promotion and Reciprocal
Protection of Investments (8 September 2012); Agreement Between the Government of Canada
and the Government of the Republic of Benin for the Promotion and Reciprocal Protection of
Investments (9 January 2013).
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recent Indian BITs,104 the US–Uruguay BIT,105 the 2012 US Model BIT, and the
Japan–Korea–China Trilateral Investment Agreement.106 Thus, the US–Uruguay
BIT states that its expropriation provisions are to be interpreted in accordance with
Annex B of the treaty. Annex B provides that in determining whether an action
constitutes indirect expropriation one of the factors to be considered is ‘the extent to
which the government action interferes with distinct, reasonable investment-backed
expectations’.107 In general, treaties adopting this approach have been fairly specific in
defining the nature of such investment-backed expectations. In particular, they must
be ‘distinct’ and ‘reasonable’ to be weighed by a tribunal in determining whether
a government measure constitutes indirect expropriation. The Malaysia–Australia
FTA is even more specific, providing for consideration of ‘whether the government
action breaches the government’s prior binding written commitment, where applica-
ble, to the investor whether by contract, licence or other legal document’.108 Thus,
these treaties generally appear to adopt the approach of traditional international law
jurisprudence and state practice that requires a regulatory measure be held equiva-
lent to expropriation only if it interferes with clearly ascertainable and reasonable
investment-backed expectations, not just the investor’s subjective hopes.109

(c) Lack of proportionality
In judging whether a government’s measure constitutes indirect expropriation,
tribunals have also examined whether the challenged measure is reasonably pro-
portional to the purpose the government seeks to achieve. One important factor
of this analysis is the impact of the measure on a foreign investor versus the impact
on host country nationals. A lack of proportionality may be found if foreign inves-
tors bear an excessive amount of the burden imposed by the measure.

104 Agreement for the Promotion and Protection of Investments between the Republic of
Colombia and the Republic of India (10 November 2009); Agreement between the Government
of the Republic of India and the Government of Latvia for the Promotion and Protection of
Investments (18 February 2010); Agreement between the Government of the Republic of India and
the Government of the Republic of Lithuania for the Promotion and Protection of Investments (31
March 2011); Agreement between the Government of the Republic of India and the Government of
the Republic of Slovenia on the Mutual Promotion and Protection of Investments (14 June 2011);
Agreement between the Government of India and the Government of Nepal for the Promotion and
Protection of Investments (21 October 2011).
105 Treaty between the United States of America and the Oriental Republic of Uruguay
Concerning the Encouragement and Reciprocal Protection of Investment (4 November 2005).
106 Agreement among the Government of Japan, the Government of the Republic of Korea and
the Government of the People’s Republic of China for the Promotion, Facilitation and Protection
of Investment (13 May 2012).
107 Treaty between the United States of America and the Oriental Republic of Uruguay
Concerning the Encouragement and Reciprocal Protection of Investment (4 November 2005) Annex
B, at 4(a)(ii).
108 Malaysia–Australia Free Trade Agreement (22 May 2012), Annex on Expropriation, at 3(b).
109 eg Oscar Chinn Case (UK v Belgium) (Judgment) (12 December 1934) (1934) PCIJ Series
A/B, No 63, at 88; Starrett Housing Corp v The Government of the Islamic Republic of Iran (19
December 1983) 4 Iran-USCTR 122, 256.
342 Protection Against Expropriation
One important source of the proportionality test is found in the jurisprudence

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of the European Court of Human Rights. That Court has held:
Not only must a measure depriving a person of his property pursue, on the facts as well
as in principle, a legitimate aim ‘in the public interest,’ but there must also be a reason-
able relationship of proportionality between the means employed and the aim sought to
be realised . . . [t]‌he requisite balance will not be found if the person concerned has had to
bear an individual and excessive burden . . . [therefore,] the Court considers that a measure
must be both appropriate for achieving its aim and not disproportionate thereto.110
In reaching this conclusion, the Court took into account the fact that ‘non-nationals
are more vulnerable to domestic legislation: unlike nationals, they will generally
have played no part in the election or designation of its authors nor have been con-
sulted on its adoption’. Additionally, it noted that ‘although a taking of property
must always be effected in the public interest, different considerations may apply
to nationals and non-nationals and there may well be legitimate reason for requir-
ing nationals to bear a greater burden in the public interest than non-nationals’.111
The test for proportionality, as developed by the European Court of Human
Rights, has influenced the approach of investor–state arbitration tribunals when
applying treaty provisions to governmental measures that allegedly amount to
indirect expropriation. In Tecmed v Mexico, the tribunal stated that in addition
to the negative financial impact of regulatory measures on foreign investments,
the question of whether such measures were proportional to the public interest
protected and to the protection legally granted to the investments should also
be considered. While acknowledging that the starting point for such an analysis
should be due deference to the state’s determination of issues affecting public
policy and society as a whole, as well as what actions are necessary to protect
those interests, the tribunal found that that deference would not prevent it from
examining the actions of Mexico in the light of the Spain–Mexico BIT’s expro-
priation clause.112 The tribunal determined that the expropriation clause asked
whether such measures ‘are reasonable with respect to their goals, the deprivation
of economic rights and the legitimate expectations of who suffered such depriva-
tion’.113 Affirming that ‘there must be a reasonable relationship of proportionality
between the charge or weight imposed to the foreign investor and the aim sought
to be realized by any expropriatory measure’, the Tecmed tribunal explained that
‘to value such charge or weight, it is very important to measure the size of the
ownership deprivation caused by the actions of the state and whether such depri-
vation was compensated or not’.114 Additionally, drawing on the jurisprudence of

110 James and Ors v the United Kingdom, ECHR App No 8793/79 (Judgment) (21 February
1986) Series A, No 98, at 19–20.
111 ibid 24.
112 Acuerdo para la Promoción y Protección Reciproca de Inversiones entre el Reino de España y
los Estados Unidos Mexicanos (10 October 2006), Art V.
113 Técnicas Medioambientales Tecmed SA v The United Mexican States, ICSID Case No ARB(AF)
00/2 (Award) (29 May 2003) ¶ 122.
114 ibid.
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the European Court of Human Rights, the tribunal found it necessary to consider
the fact that foreign investors have little or no impact on the decision-making
that affects them, since they are not entitled to exercise domestic political rights,
such as voting.115 Having analysed the circumstances surrounding the revocation
of the landfill permit, the tribunal found that the situation contained no emer-
gency circumstances, serious social situation, or even any urgency. Therefore, it
determined that the measures undertaken by the Mexican authorities were not
proportional to the aim sought and so were equivalent to an expropriation.
In LG&E v Argentina, the tribunal cited the Tecmed decision and applied the
proportionality test. It stated:
with respect to the power of the State to adopt its policies, it can generally be said that the
State has the right to adopt measures having a social or general welfare purpose, and in
such a case, the measure must be accepted without any imposition of liability, except in
cases where the State’s action is obviously disproportionate to the need being addressed.116
According to the tribunal, the relevant proportionality test for questions regard-
ing the right to regulate is whether the measures are proportional to the public
interest protected and to the legal protection accorded to investments. The tribu-
nal also found that the significance of a regulatory measure’s impact on foreign
investments should be taken into account as well.117 Although LG&E thus reaf-
firmed Tecmed’s proportionality test,118 it concluded that the measures taken by
Argentina to deal with its crisis did not deprive the claimants of the economic
value of their investment and therefore did not constitute an indirect expropria-
tion; however, it did not specifically state whether the measures challenged were
proportional to the aims they sought to achieve.

(d) Non-transparency, arbitrariness, and discrimination

Another factor that may contribute to a finding of indirect expropriation is that
the challenged measure or the process by which it was enacted is non-transparent,
arbitrary, or discriminatory. The degree to which this factor will affect an ultimate
judgment on the legality under an expropriation clause of such measure will usu-
ally depend on the facts of the individual case. For example, in Feldman v Mexico,
a case that concerned the Mexican tax authorities’ allegedly non-transparent
and arbitrary treatment of a US investor, a tribunal rejected claims of indirect
expropriation because it considered it ‘doubtful that lack of transparency alone
rises to the level of violation of NAFTA and international law, particularly given

115 ibid.
116 LG&E Energy Corp, LG&E Capital Corp, LG&E International INC v Argentine Republic,
ICSID Case No ARB/02/1 (Decision on Liability) (3 October 2006) ¶ 195.
117 ibid.
118 The proportionality requirement was more recently confirmed by the tribunal in Deutsche
Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2 (Award) (31
October 2012) ¶ 522.
344 Protection Against Expropriation
the complexities not only of Mexican but most other tax laws’.119 The tribunal

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thought it was undeniable that the investor had experienced great difficulty in
dealing with tax officials and in some respects was treated in a less than reasonable
manner. Nevertheless, it found that such treatment did not rise to the level of a
violation of Article 1110 of NAFTA, adding with evident sympathy that ‘unfor-
tunately, tax authorities in most countries do not always act in a consistent and
predictable way’.120
On the other hand, in Metalclad v Mexico the tribunal found that the chal-
lenged measures, taken together with the representations of the Mexican fed-
eral government, on which Metalclad relied, and the absence of a timely, orderly,
or substantive basis for the denial by the municipality of the local construction
permit, amounted to an indirect expropriation.121 And in SD Myers, a NAFTA
tribunal also had to examine whether the practical effect of the Canadian regu-
latory measures aimed at protecting the environment actually created a dispro-
portionate benefit for Canadian nationals versus foreign investors and whether
those measures prima facie favoured the nationals over non-nationals. Based on
an extensive review of the facts, the tribunal concluded that the measures in ques-
tion were designed for protectionist purposes and so were discriminatory against
the claimants.122 This finding of discrimination lent additional support to the
tribunal’s determination that the challenged Canadian regulatory measures were
tantamount to expropriation. Thus, in certain cases, instances of non-transparent,
arbitrary, and discriminatory conduct by a host state may aid in establishing that
a regulatory measure ostensibly enacted for public policy purposes actually con-
cealed de facto expropriatory conduct.
Recent treaties, such as the investment chapters of US FTAs, the investment
chapter of the Malaysia–Australia FTA, the US–Uruguay BIT, Turkish BITs,123
Canadian BITs, Indian BITs, and the Japan–Korea–China Trilateral Investment
Agreement, have made non-discrimination an explicit criterion for judging the
legality of governmental measures. The Canada–China BIT, for example, states:
Except in rare circumstances, such as if a measure or series of measures is so severe in light
of its purpose that it cannot be reasonably viewed as having been adopted and applied in
good faith, a non-discriminatory measure or series of measures of a Contracting Party that
is designed and applied to protect the legitimate public objectives for the well-being of

119 Feldman v Mexico, ICSID Case No ARB(AF)/99/1 (Award on Merits) (16 December
2002) ¶ 133.
120 ibid ¶ 113.
121 The tribunal stated: ‘These measures, taken together with the representations of the Mexican
federal government, on which Metalclad relied, and the absence of a timely, orderly or substan-
tive basis for the denial by the Municipality of the local construction permit, amount to an indi-
rect expropriation.’ Metalclad Corp v Mexico, ICSID Case No ARB(AF)/97/1 (Award) (30 August
2000) ¶ 107.
122 SD Myers, Inc v Canada, UNCITRAL (First Partial Award) (13 November 2000) ¶¶ 221–255.
123 See eg Agreement between the Government of the Republic of Turkey and the Government
of the People’s Republic of Bangladesh Concerning the Reciprocal Promotion and Protection of
Investments (12 April 2012), Art 6(2).
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citizens, such as health, safety and the environment, does not constitute indirect expropria-
tion.124 (emphasis added)

(e) Sole effects versus purpose and context of the measure

As indicated previously, one of the crucial factors in determining whether a
host state measure is equivalent to expropriation is the severity of its effects on
the investment. At the same time, a controversial question still remains unre-
solved: whether tribunals should focus solely on the effects of the challenged
measure or whether they should consider the purpose and context of the measure.
The dominant view is that the measure’s effects should be the sole criterion125 and
that the state’s intentions in making the measure should be given little weight.126
Early support for this view is found in the Norwegian Shipowners’ Claims127 and
Chorzów Factory128 cases. The jurisprudence of the Iran–US claims tribunal,129
non-treaty expropriation cases,130 and NAFTA cases131 have all served to empha-
size the importance of effects over intentions132 in evaluating the expropriatory
character of governmental measures.
Some cases have given weight to the intention of the state and the context of the
measures adopted when evaluating whether they constituted indirect expropria-
tion. In LG&E v Argentina, which arose out of the measures taken by Argentina
to confront its economic crises, the tribunal acknowledged that ‘there is no doubt
that the facts relating to the severity of the changes on the legal status and the
practical impact endured by the investors in this case, as well as the possibil-
ity of enjoying the right of ownership and use of the investment are decisive in
establishing whether an indirect expropriation is said to have occurred’. However,
an important question for the tribunal was ‘whether one should only take into

124 Agreement between the Government of Canada and the Government of the People’s Republic
of China for the Promotion and Reciprocal Protection of Investments (8 September 2012), Annex
B.10, at 3.
125 R Dolzer, ‘Indirect Expropriations: New Developments?’ (2002) 14 NYU Envir LJ 64, 64;
Reinisch (n 13 above) 405.
126 See Compañía de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic,
ICSID Case No ARB/97/3 (Award) (20 August 2007) ¶ 7.5.20 (‘There is extensive authority for the
proposition that the state’s intent, or its subjective motives are at most a secondary consideration’);
Spyridon Roussalis v Romania, ICSID Case No ARB/06/1 (Award) (1 December 2011) ¶ 330 (‘The
intention or purpose of the State is relevant but is not decisive of the question whether there has
been an expropriation’).
127 Norwegian Shipowners’ Claims (Norway v United States) (Perm Ct Arb 1922) 1 RIAA 307.
128 Case Concerning Certain German Interests in Polish Upper Silesia (FRG v Poland) (1926) PCIJ
Series A, No 7.
129 See eg Tippets et al v TAMSEFTA (1984) 6 Iran-USCTR 219.
130 See eg Biloune and Marine Drive Complex Ltd v Ghana Investments Centre and the Government
of Ghana, UNCITRAL (Award on Jurisdiction and Liability) (27 October 1989).
131 See eg Metalclad Corp v Mexico, ICSID Case No ARB(AF)/97/1 (Award) (30 August 2000) in
which the tribunal stated that it ‘need not decide or consider the motivation or intent of the adop-
tion of the Ecological Decree . . . [h]‌owever, [it] considers that the implementation of the Ecological
Decree would, in and of itself, constitute an act tantamount to expropriation’ ibid ¶ 111.
132 Reinisch (n 13 above) 405, 446.
346 Protection Against Expropriation
account the effects produced by the measure or if one should consider also the

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context within which a measure was adopted and the host state’s purpose’. The tri-
bunal answered in the following way: ‘It is this tribunal’s opinion that there must
be a balance in the analysis both of the causes and the effects of a measure in order
that one may qualify a measure as being of an expropriatory nature.’133 Relying on
a balancing approach, the tribunal concluded that Argentina’s gas tariff measures
were not the equivalent of an expropriation.
Despite the overwhelming importance attached to analysing the effects of a
measure by arbitral jurisprudence and scholarly doctrine, it is suggested that the
LG&E decision offers a useful reminder of the importance of also considering
intention and context when judging whether a measure is expropriatory. LG&E’s
approach of balancing effects with context and purposes seems a prudent way to
give due deference to a state’s legitimate right to regulate. Moreover, giving an
exclusive role only to the ‘effects’ of the challenged measure without placing those
effects in a broader context may lead to an incomplete analysis that is unintention-
ally biased in favour of a foreign investor. It is not solely the ‘effects’ of a regula-
tory measure that should matter but also what purpose the regulation serves, how
that regulation is implemented (transparently, non-arbitrarily, without discrimi-
nation), whether the means employed are proportionate to the ends pursued, and
whether there are less restrictive alternatives available. Only through a contextual
analysis that allows for the weighing of many relevant factors will it be possible
to achieve a balanced approach when considering indirect expropriation claims.
Such an approach would lead to more objective awards and contribute to the
perception of legitimacy and justice in the international investment legal regime.
The prudence of this approach can also be seen in recent state practice. For exam-
ple, some international investment treaties134 now explicitly provide that deter-
mining whether an action or series of actions constitutes an indirect expropriation
requires a case-by-case, fact-based inquiry that considers: (1) the economic impact
of the government action; (2) the extent to which the government action interferes
with distinct, reasonable, investment-backed expectations; and (3) the character
of the government action, among other factors. More importantly, such provisions
stipulate that although the fact that an action or series of actions has an adverse
effect on the economic value of an investment may be relevant, economic impact
standing alone does not establish that an indirect expropriation has occurred.135

133 LG&E Energy Corp, LG&E Capital Corp, LG&E International INC v Argentine Republic,
ICSID Case No ARB/02/1 (Decision on Liability) (3 October 2006) ¶ 194.
134 US–Australia Free Trade Agreement (18 May 2004); US–Chile Free Trade Agreement
(6 June 2003); US–Morocco Free Trade Agreement (15 June 2004); US–Singapore Free Trade
Agreement (6 May 2003); Treaty between the United States of America and the Oriental Republic
of Uruguay Concerning the Encouragement and Reciprocal Protection of Investment (4 November
2005); Agreement between Canada and the Republic of Peru for the Promotion and Protection of
Investments (14 November 2006).
135 See Agreement between the Government of the Republic of India and the Government of
Latvia for the Promotion and Protection of Investments (18 February 2010), Ad Art 5(4)(b): ‘Actions
by a Government or Government controlled bodies, taken as a part of normal business activities,
will not constitute indirect expropriation unless it is prima facie apparent that it was taken with an
intent to create an adverse impact on the economic value of an investment.’
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Faced with applying such a provision, an international tribunal will be bound to
recognize the dispositive character of that language and extend its indirect expro-
priation analysis to include factors outside economic impact. Moreover, that such
treaties do not set down an exhaustive list of factors allows tribunals to refer to
other relevant facts and sources of international law for guidance.

12.9 Newer Treaties’ Approach to Distinguishing Legitimate

Regulation from Indirect Expropriation

Although investment treaties have not traditionally provided specific guid-

ance on how to distinguish indirect expropriations from legitimate regu-
latory measures, a few more recent treaties appear to have moved in this
direction by giving explicit criteria on how to determine whether a particular
regulatory measure amounts to an indirect expropriation. In particular, the
2004 and 2012 US Model BITs136 and the 2004 Canadian Model Foreign
Investment Protection Agreement (FIPA) have adopted this approach, pre-
sumably in response to the two countries’ experience in investment arbitra-
tions under NAFTA’s Chapter 11. The basic approach taken is to state the
provision on expropriation in the traditional manner but then indicate that
those provisions are to be interpreted in accordance with attached treaty
annexes that set down criteria to be used when determining whether a gov-
ernmental measure constitutes an indirect expropriation. These new models
became the basis for multiple BITs and the investment chapters in various
US FTAs.
Article 6 of the US–Uruguay BIT states the traditional rule against expropria-
tion,137 but also requires that it be interpreted in accordance with Annexes A and
B of the treaty. Among other things, the Annexes make clear that (1) Article 6(1)
is intended to reflect customary international law concerning the obligation of

136 For a discussion of innovations in US investment treaty practice, see D Gantz, ‘The Evolution
of FTA Investment Provisions: From NAFTA to the United States–Chile Free Trade Agreement’
(2004) 194 Amer U Intl L Rev 679; N Rubins, ‘The Arbitral Innovations of Recent U.S. Free Trade
Agreements: Two Steps Forward, One Step Back’ (2003) 8 Int’l Bus LJ 865; M Kantor, ‘Investor–
State Arbitration over Investments in Financial Services: Disputes under New U.S. Investments
Treaties’ (2004) 121 Banking LJ 579.
137 US–Uruguay BIT, Art 6(1) states:
Neither Party may expropriate or nationalize a covered investment either directly or
indirectly through measures equivalent to expropriation or nationalization (‘expropria-
tion’), except:
(a) for a public purpose;
(b) in a non-discriminatory manner;
(c) on payment of prompt, adequate, and effective compensation; and
(d) in accordance with due process of law and Article 5(1) through (3).
Treaty between the United States of America and the Oriental Republic of Uruguay Concerning
the Encouragement and Reciprocal Protection of Investment (4 November 2005).
348 Protection Against Expropriation
states with respect to expropriation; (2) an action or a series of actions by a party

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cannot constitute an expropriation unless it interferes with a tangible or intan-
gible property right or interest in an investment; (3) an indirect expropriation
occurs ‘where an action or series of actions by a Party has an effect equivalent
to direct expropriation without formal transfer of title or outright seizure’; and
(4) ‘the determination of whether an action or series of actions by a Party, in a
specific fact situation, constitutes an indirect expropriation, requires a case-by-
case, fact-based inquiry’. This inquiry itself requires a consideration of various
factors, including:
(i) the economic impact of the government action, although the fact that an action
or series of actions by a Party has an adverse effect on the economic value of an
investment, standing alone, does not establish that an indirect expropriation has
occurred;
(ii) 
the extent to which the government action interferes with distinct, reasonable
investment-backed expectations; and
(iii) the character of the government action.

Article 13 of the Canada–Peru 2006 BIT parallels the language of Article 6 of

the US–Uruguay 2005 BIT and requires it be interpreted in the light of Annex
B.13(1), which states the criteria for distinguishing indirect expropriations from
legitimate regulation in terms almost identical to those of the US model. One of
the purposes of the US and Canadian annexes is to limit and provide guidance
to investor–state arbitral tribunals that interpret expropriation clauses in disputes
over the nature of governmental measures
One finds a similar approach in the 2009 ASEAN Comprehensive Investment
Agreement in which Article 14 obliges the contracting states not to nation-
alize or expropriate covered investments except for a public purpose, in a
non-discriminatory way, on payment of prompt adequate and effective compen-
sation, and in accordance with due process of law. A footnote note to Article 14
stipulates that the article is to be read with Annex 2 of the treaty, which states
that the determination of whether a particular action or series of actions by a
member state constitutes an expropriation ‘requires a case-by-case fact-based
inquiry’ that considers the following three factors, among others: (1) the eco-
nomic impact of the action, although the existence of an adverse economic
effect on the value of an investment does not establish the existence of an expro-
priation; (2) whether the government’s action breaches the government’s prior
written commitments to the investor; and (3) the character of the government
action and whether it is disproportionate to the public purpose for which the
action was taken.138

138 ASEAN Comprehensive Investment Agreement, available at <http://www.asean.org/

images/2012/Economic/AIA/Agreement/ASEAN%20Comprehensive%20Investment%20
Agreement%20(ACIA)%202012.pdf> Art 14 and Annex 2, accessed 15 September 2014.
 Conditions for Legality of Expropriations 349

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12.10 Conditions for the Legality
of Expropriations, Nationalizations, and Dispossessions

Even if an act of a government is found to expropriate an investment, it may still be

legal if it meets certain specified conditions. Traditionally, customary law considers
an expropriation to be legal if the expropriatory measure is: (1) for a public purpose;
(2) not arbitrary or discriminatory; (3) done in accordance with due process of law;
and (4) accompanied by compensation. To a significant degree, modern investment
treaties have incorporated these conditions for determining an expropriation’s legal-
ity.139 Indeed, they have become so common in investment treaties that one can
argue with justification that they constitute customary international law on expro-
priation of property held by foreign nationals. The following sections consider each
condition briefly.

(a) Expropriation measure must be for a public purpose

Virtually all investment treaties adopt the traditional customary international law
position that an expropriation must be for a ‘public purpose’. Since virtually any tak-
ing by a government can ostensibly be justified on these grounds, investors are rarely
successful in challenging the legality of government taking because it is not for a pub-
lic purpose. One exception was ADC Affiliate Ltd and ADC & ADMC Management
Ltd v Republic of Hungary, an ICSID case that arose when the Hungarian government
expropriated the claimants’ interest in the operation of a terminal at Budapest airport.
The claimants alleged that in expropriating its interest the Hungarian government
did not meet any of the four conditions required by the applicable Cyprus–Hungary
BIT, including the requirement that ‘[t]‌he measures are taken in the public interest’.
The tribunal found that although the concept of ‘public interest’ is inherently broad,
the requirement of ‘public interest’ in the treaty nonetheless necessitated some genu-
ine interest of the public: ‘If mere reference to “public interest” can magically put
such interest into existence and therefore satisfy this requirement, then this require-
ment would be rendered meaningless since the Tribunal can imagine no situation
where this requirement would not have been met.’140 Ultimately, the tribunal found
that no public interest was served by depriving the claimants of their investment.141
That finding contributed to the tribunal’s decision that the Hungarian government
had illegally expropriated the claimants’ investment and that Hungary was therefore
liable to pay compensation.142

139 UNCTAD, Bilateral Investment Treaties in 1995–2006: Trends in Investment Rulemaking

(2007) 47.
140 ADC Affiliate Ltd and ADC & ADMC Management Ltd v Republic of Hungary, ICSID Case
No ARB/03/16 (Award) (2 October 2006) ¶ 432.
141 ibid ¶ 476.
142 Other arbitral cases treating this issue but which did not involve the application of invest-
ment treaties were British Petroleum v Libya (Award) (10 October 1973) (1 August 1974) (1974) 53
ILR 297, 329, in which ad hoc arbitrator explicitly assessed the public purpose requirement and
350 Protection Against Expropriation
In the Yukos cases, Russia had argued that it had acted for a public purpose in

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seizing Yukos assets; however the tribunal rejected this argument, stating:
whether the destruction of Russia’s leading oil company and largest taxpayer was in the
public interest is profoundly questionable. It was in the interest of the largest State-owned
oil company, Rosneft, which took over the principal assets of Yukos virtually cost-free, but
that is not the same as saying that it was in the public interest of the economy, polity and
population of the Russian Federation.143

(b) Expropriation must not be discriminatory

As has been shown, international investment agreements consistently provide
that nationalization and expropriation must be ‘not discriminatory’, taken ‘on a
non-discriminatory basis’, and done ‘in a non-discriminatory manner’. In ADC
v Hungary, in which the claimants alleged discriminatory expropriation of their
investment in the operation of a terminal at Budapest airport, Hungary argued
that the claimants were unable to raise that argument, since the claimants were
the only foreign parties involved in the airport’s operation. The tribunal responded
that while it was true that ‘for discrimination to exist there must be different treat-
ments to different parties’,144 the relevant comparison was between the treatment
granted to the replacement operator appointed by Hungary and the treatment
given to foreign investors as a whole. By this standard, the tribunal found that
Hungary’s actions against the claimants had indeed been discriminatory.
International jurisprudence in non-treaty cases also affirms non-discrimination
as a basic element of the international law governing expropriation. In LIAMCO,
the arbitrator held: ‘[It is] clear and undisputed that nondiscrimination is a req-
uisite for the validity of a lawful nationalization. This is a rule well-established
in international legal theory and practice . . . Therefore, a purely discriminatory
nationalization is illegal and wrongful.’145 In LETCO the tribunal stressed that
even if the Liberian government sought to justify its action as one of nationaliza-
tion, it would still have to prove that the action was non-discriminatory. Since

found that the expropriation was unlawful because it was adopted ‘for purely extraneous political
reasons as an act of retaliation for a British foreign policy decision’; and LETCO v Liberia (Award)
(31 March 1986) (1986) 26 ILM 647, 665, in which the tribunal found that the revocation of a
concession was not for a bona fide public purpose, stating:
There was no legislative enactment by the Government of Liberia. There was no evidence
of any stated policy on the part of the Liberian Government to take concessions of this
kind into public ownership for the public good. On the contrary, evidence was given to
the tribunal that areas of the concession taken away from LETCO were granted to other
foreign-owned companies.
143 Hulley Enterprises Ltd (Cyprus) v The Russian Federation, PCA AA 226 (Final Award) (18 July
2014) ¶ 1581; Yukos Universal Ltd (Isle of Man) v the Russian Federation, PCA AA 227 (Final Award)
(18 July 2014) ¶ 1581; Veteran Petroleum Ltd (Cyprus) v the Russian Federation, PCA AA 228, (Final
Award) (18 July 2014).
144 ADC Affiliate Ltd and ADC & ADMC Management Ltd v Republic of Hungary, ICSID Case
No ARB/03/16 (Award) (2 October 2006) ¶ 442.
145 Libyan American Oil Co (LIAMCO) v Libya (1977) 62 ILR 140, 194.
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the tribunal found that areas of concession taken from LETCO were granted to
other foreign-owned companies run by people who were ‘good friends of Liberian
authorities’, it concluded that the taking was discriminatory.146

(c) Expropriation must take place in accordance

with due process of law
Many investment treaties, like NAFTA, the ECT, and the ASEAN Comprehensive
Investment Agreement provide that expropriation, nationalizations, or disposses-
sions of protected investment must take place according to ‘due process of law’.
The treaties themselves usually do not define this term, which, of course, has deep
roots in many legal systems. In ADC v Hungary, in which the claimants argued
that Hungary had not respected due process of law when it expropriated their
investment, the tribunal sought to define the term. It stated:
due process of law demands an actual and substantive legal procedure for a foreign inves-
tor to raise its claims against the depriving actions already taken or about to be taken
against it. Some basic legal mechanisms, such as reasonable advance notice, a fair hearing
and an unbiased and impartial adjudicator to assess the actions in dispute, are expected to
be readily available and accessible to the investor to make such legal procedure meaning-
ful. In general, the legal procedure must be of a nature to grant an affected investor a rea-
sonable chance within a reasonable time to claim its legitimate rights and have its claims
heard. If no legal procedure of such nature exists at all, the argument that ‘the actions are
taken under due process of law’ rings hollow.147
The tribunal found that Hungary had not made any of these procedures and
mechanisms available to the claimants and that expropriation in violation of the
due process requirement of the treaty had indeed taken place. Similarly in the
Yukos cases, although Russia claimed that the seizure of the assets and treatment
of the investors had been done according to law, the tribunal concluded that it
had not been ‘carried out under due process of law’, as required by Article 13(1)
(c) of the ECT. In particular it found that ‘Russian courts bent to the will of
Russian executive authorities to bankrupt Yukos, assign its assets to a State con-
trolled company, and incarcerate a man who gave signs of becoming a political
competitor’.148
Some investment treaties contain language explaining the due process require-
ments necessary for expropriation and compensation. For example, Article 5(3) of
the 2000 Austria–Bosnia-Herzegovina BIT provides:
Due process of law includes the right of an investor of a Contracting Party which claims to
be affected by expropriation by the other Contracting Party to prompt review of its case,
including the valuation of its investment and the payment of compensation in accordance

146 LETCO v Liberia (Award) (31 March 1986) (1986) 26 ILM 647, 665.
147 ADC Affiliate Ltd and ADC & ADMC Management Ltd v Republic of Hungary, ICSID Case
No ARB/03/16 (Award) (2 October 2006) ¶ 435.
148 Yukos (n 143 above) ¶ 1583.
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with the provisions of this Article, by a judicial authority or another competent and inde-
pendent authority of the latter Contracting Party.149

(d) Expropriation must be accompanied by compensation

A simple determination by a tribunal or other body that a host state has expro-
priated assets in violation of treaty provisions is, by itself, of little comfort to the
loser of those assets. What is important to that investor is that the offending state
fully compensates it for the lost investment. However, the importance of securing
compensation for treaty violations serves a greater purpose than achieving justice
in an individual case. It also serves the important goal of assuring respect for
investment treaty rules and fostering investment regime effectiveness, ultimately
preserving the regime itself. From the point of view of regime maintenance, being
able to obtain compensation effectively from treaty violators raises the costs of
treaty violations and will therefore induce other potential violators to respect their
bargains with foreign investors protected by investment treaties.
As Chapter 3 indicated, one of the most debated issues among negotiators and
scholars has been the extent to which customary international law requires states
to pay compensation to foreigners for expropriated assets. Investment treaties have
sought to settle that debate by affirming that the payment of compensation for
expropriation is an international obligation and by articulating the principles that
should be applied in determining the amount of compensation required.
Unlike violations of other treatment standards, virtually all investment trea-
ties make the payment of compensation a specific condition for expropriation.
However, it is one thing for a treaty to enunciate a general principle requiring
compensation, it is quite another for a tribunal to determine precisely the amount
of compensation that an offending state must pay to an investor for the expropria-
tion of particular assets at a particular time. To accomplish that task, one must
value the loss resulting from expropriation and that requires at least three ele-
ments: (1) a standard of compensation; (2) a method for applying that standard;
and (3) the actual application of the chosen valuation method to the specific assets
that have been expropriated. Each of these three elements is examined briefly.

(i) The standard of compensation

Compensation for injury requires a standard for determining precisely what an
injured party should receive as a result of a state’s wrongful conduct. As noted in
Chapter 3, before the development of investment treaties, considerable disagree-
ment existed within the international community regarding what standard should
be applied in cases of expropriation. One of the purposes of the investment treaty
movement was to end that debate by agreeing to an international standard. In a

149 Agreement between the Republic of Austria and Bosnia and Herzegovina for the Promotion
and Protection of Investments (2 October 2000).
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reflection of the increasing convergence on the issue, many treaties have adopted
some version of the ‘Hull formula’, which requires that compensation should be
‘prompt, adequate and effective’.150 The term ‘prompt’ generally means that pay-
ment should be made without undue delay. ‘Effective’ means that the payment
should be made in realizable and readily transferable currency; accordingly, pay-
ment in forty-year bonds denominated in local currency, for example, would not
be considered effective. ‘Adequate’ compensation has been much more difficult to
define. In a real sense, in the contentious relationships between offending states
and aggrieved investors, adequacy exists in the eye of the beholder. Treaties have
therefore sought to give greater precision to the standard.
Rather than leave the interpretation of the standard of prompt, adequate, and
effective compensation solely to the discretion of arbitrators, many investment
treaties define the terms in detail and provide instruction for their application. For
instance, it is common for investment treaties to specify that the investor shall be
owed the ‘market value’ of the investment before the expropriatory act was taken or
became known to the public. Moreover, treaties also authorize tribunals to award
interest on the amount owing from the date of expropriation until the respond-
ent state pays the injured investor. For example, Article 5 of the Korea–Congo
BIT, while requiring compensation for expropriation to be ‘prompt, adequate and
effective’ also provides that such compensation shall amount to:
the fair market value of the expropriated investments immediately before the expropria-
tion took place or before the impending expropriation became public knowledge, which-
ever is the earlier, shall include interest at the applicable commercial rate from the date
of expropriation until the date of payment, and shall be made without undue delay, be
effectively realizable, and be freely transferable.151
Similarly, the second paragraph of Article 1110 of NAFTA seeks to set down a
standard for compensation with some degree of specificity:
2. Compensation shall be equivalent to the fair market value of the expropriated invest-
ment immediately before the expropriation took place (‘date of expropriation’), and shall
not reflect any change in value occurring because the intended expropriation had become
known earlier. Valuation criteria shall include going concern value, asset value (including
declared tax value of tangible property) and other criteria, as appropriate to determine fair
market value.
Subsequent paragraphs of Article 1110 specify that compensation is to be paid
without delay, that it shall include interest at commercial rates from the date of
expropriation to the date of payment, and that upon payment the compensation
will be freely transferable.

150 UNCTAD, Bilateral Investment Treaties in 1995–2006: Trends in Investment Rulemaking

(2007) 48; Dolzer and Schreuer (n 9 above) 91.
151 Agreement between the Government of the Republic of Korea and the Government of the
Democratic Republic of Congo for the Promotion and Protection of Investments (17 March 2005).
354 Protection Against Expropriation
A few treaties are less specific in establishing standards of compensation. Instead

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of market value, they may require ‘real value’,152 ‘reasonable compensation’,153 or
simply ‘compensation’.154 These formulations of a treaty’s standard for compensa-
tion provide ample room for controversy as to their meaning and application in
specific expropriation cases. Therefore, they may have the net effect of increasing
investors’ insecurity about their rights in cases of expropriation. For example, a
standard of ‘just compensation’ would allow a state to offset environmental or
other damage, while the ‘market value’ is less amenable to such an interpretation.
Indeed, the concept of market value seems to be more concrete and so may be
more easily applied than other options employed in international treaties.
Even a treaty’s specific promise to pay market value for expropriated investments
may be problematic in specific cases. For one thing, investment treaties rarely
define in detail the specific meaning of ‘market value’ or ‘effective compensation’.
Consequently, the very content of the standard may become a subject of contro-
versy between aggrieved investors and offending host states. Arbitral tribunals
have defined the term by drawing on the notion of a market transaction between
willing buyers and sellers. Thus, one useful definition of market value, elaborated
by the Iran–US claims tribunal in Starrett Housing Corporation v Iran is ‘the price
that a willing buyer would pay to a willing seller in circumstances in which each
had good information, each desired to maximize his financial gain, and neither
was under duress or threat, the willing buyer being a reasonable person’.155

(ii) The question of compensation for legal and illegal expropriations

One common reading of treaty provisions on compensation for expropriation
would lead to the conclusion that tribunals are to apply the stipulated standard
of compensation not only to determine whether a state has lawfully expropriated
an investment but also to determine the amount to be awarded to the inves-
tor in the event that the tribunal decides that the state has unlawfully expropri-
ated that same investment. In short, the treaty standard of compensation is not
only a condition for a lawful expropriation but it also states the consequence of an
unlawful one. A different interpretation would suggest that the valuation prin-
ciples stipulated in investment treaties apply only to ‘legal expropriations’, that
is, expropriations that meet the treaty’s required conditions. Compensation for
illegal expropriation, on the other hand, is governed not by the treaty provisions

152 Agreement between the Government of the Kingdom of Thailand and the Government of
the Hong Kong Special Administrative Region of the People’s Republic of China for the Promotion
and Protection of Investments (19 November 2005), Art 5(1).
153 Agreement between the Government of Australia and the Government of the People’s
Republic of China on the Reciprocal Encouragement and Protection of Investments (11 July 1988),
Art 8.1.
154 Agreement on the Encouragement and Protection of Investments between the Government
of Hong Kong and the Government of the Kingdom of the Netherlands (19 November 1992),
Art 5(1).
155 Starrett Housing Corp v The Government of the Islamic Republic of Iran (19 December 1983) 4
Iran-USCTR 122, 201.
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on expropriation compensation but on the principles of customary international
law, as illustrated by the Chorzów Factory case, which requires that to the extent
possible the offending state restore the investor to the situation that would have
existed before illegal expropriation took place.156 Under this view, while mar-
ket value immediately prior to expropriation might be the applicable standard
in cases of legal expropriation, in cases of illegal expropriation the appropriate
standard is the amount necessary to restore the investor to the situation it would
have been in had the illegal act never taken place. The application of these two
standards to the same set of facts can lead to very different results. For example,
the latter might well take into account lost profits and any increase in enterprise
value following the expropriation, while the former might not. The tribunal in
ADC v Hungary was faced with this precise issue in determining the appropriate
standard of compensation to apply to Hungary’s expropriation of the claimants’
investments in a Budapest airport terminal. Hungary argued that the appropriate
standard was ‘market value’, since the applicable BIT provided that the ‘amount
of compensation must correspond to the market value of the expropriated invest-
ments at the moment of the expropriation’.157 The tribunal concluded, however,
that this standard applied only to cases of legal expropriation and not to illegal
expropriations.158 The treaty made no reference to the standard to be applied to
illegal expropriations, which included Hungary’s expropriation of the claimants’
investment. Consequently, the tribunal turned to customary international law to
find a standard. The tribunal concluded that the appropriate standard was found
in the Chorzów Factory case judgment: ‘reparation must, as far as possible, wipe
out all the consequences of the illegal act and re-establish the situation which
would, in all probability, have existed if that act had not been committed’.159
One may question whether the tribunal’s interpretation of the applicable BIT
was correct. The treaty provision in question provided that ‘[n]‌either Contracting
Party shall take any measures depriving, directly or indirectly, investors of the
other Contracting Party of their investments unless . . . the measures are accompa-
nied by provision for the payment of just compensation’.160 As indicated earlier,
just compensation was to be market value and the treaty makes no distinction
between legal and illegal deprivation measures. The treaty refers only to measures
depriving investors of their property. By not making provision for the payment of
market value Hungary undoubtedly violated its treaty obligation, but according to
the treaty the proper remedy is the payment of compensation equal to the market
value of the investment. Moreover, a strict application of the tribunal’s reasoning

156 Dolzer and Schreuer (n 9 above) 92, who state that the latter position is ‘the better view’.
157 Agreement between the Government of the Republic of Cyprus and the Government of the
Hungarian People’s Republic on Mutual Promotion and Protection of Investments (24 May 1989),
Art 4(2).
158 ADC Affiliate Ltd and ADC & ADMC Management Ltd v Republic of Hungary, ICSID Case
No ARB/03/16 (Award) (2 October 2006) ¶ 481.
159 ibid ¶ 484.
160 Agreement between the Government of the Republic of Cyprus and the Government of the
Hungarian People’s Republic on Mutual Promotion and Protection of Investments (24 May 1989),
Art 4(1).
356 Protection Against Expropriation
would lead to the curious result that in cases in which an expropriation meets all

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the conditions for a legal expropriation except for a determination by the tribunal
that the host state had not paid market value for the property expropriated, such
an expropriation would have to be considered ‘illegal’ and compensation would
therefore be awarded not on the basis of the valuation standard in the treaty but
on the basis of the Chorzów Factory principle and customary international law. It
is suggested that such a result may not accord with the intention of the contract-
ing states as evidenced by the treaty text.

(iii) Valuation methods
Once a tribunal or other body has determined an appropriate standard of com-
pensation, it must apply that standard to a specific set of circumstances to arrive
at the appropriate amount of compensation to award to the injured investor. In
order to accomplish that task, an appropriate valuation methodology must be
employed.
It is often said that ‘valuation is more art than science’. One of the reasons for
this sentiment is that many diverse, seemingly scientific valuation methods can be
applied in different ways to arrive at different results. This diversity of valuation
methods is apparent in the calculation of investor compensation in cases of expro-
priation.161 One of the reasons for this diversity of methods is that investment
treaties do not provide guidance on the methodology to be applied in deciding on
‘fair market value’, ‘real value’, ‘adequate compensation’, or whatever compensa-
tion standard is specified in the treaty. So, while the definitions of market value
quoted earlier in this chapter are helpful, neither they nor investment treaties
employing them explain precisely how to apply the concept to expropriated assets
in particular cases. Indeed, often the determination of what a willing buyer would
pay a willing seller for an expropriated asset prior to the expropriation is a highly
speculative exercise. In fact, in many cases no willing buyer or willing seller for
such an asset exists to provide concrete data for such a determination.
In the absence of such treaty-based guidance, parties and their experts have
employed a variety of valuation techniques from the fields of finance and eco-
nomics, none of which are specifically authorized by investment treaty provisions.
Among the principle valuation methods employed are the following:
1. book value, which is based on the actual costs incurred to establish the
investment as those costs are reflected on the books (ie the balance sheet) of
the affected enterprise;
2. replacement value, which is the amount needed to acquire an asset of the
same type as that which was expropriated;

161 TW Wälde and B Sabhi, ‘Compensation, Damages, and Valuation’ in P Muchlinski (n

13 above) 1049, 1070–82; M Ball, ‘Assessing Damages in Claims by Investors Against States’ 16
ICSID Rev—FILJ (2001) 408; A Newcombe and L Paradell (n 21 above) 385–93.
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3. liquidation value, which is what a willing buyer would pay for the assets of
the expropriated enterprise in liquidation; and
4. going-concern value or discounted cash flow (DCF), which is a
forward-looking method that values the enterprise on the basis of its future
expected cash and then, using a discount rate that takes account of the
cost of capital and risk, discounts that estimated cash flow to arrive at a
present value.
When applied to the same set of facts, each of these methods may result in a
considerable variation in values. The choice of the appropriate method and how
it should be applied is always the subject of significant dispute among the parties.
While individual tribunals and negotiators usually arrive at a pragmatic answer,
the law of investment treaties gives little guidance to them in choosing and using
valuation methods. Chapter 16, which considers the consequences of treaty viola-
tions, will examine these issues at greater length.