Expropriation Standards in Investment Rules

From the previously mentioned Norwegian draft model BIT (MS Word document) that reader Perry Bechky pointed me to:

ARTICLE [6]: EXPROPRIATION

1. A Party shall not expropriate or nationalise an investment of an investor of the other Party except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

...

What's noticeably absent is the "measures equivalent to expropriation or nationalization" or "measures tantamount to nationalization or expropriation" language.

I'm not sure how much detail we will get during the campaign about the specifics of trade agreement rules, but I wonder if this meets the goal of Senator Obama, mentioned here, that "... With regards to provisions in several FTAs that give foreign investors the right to sue governments directly in foreign tribunals, I will ensure that foreign investor rights are strictly limited and will fully exempt any law or regulation written to protect public safety or promote the public interest."

Comments

[anon99]

Arguably, the concept of "expropriation" under international law encompasses not only outright expropriations, but also "measures tantamount to expropriation". Thus, whether or not these words are included or not in an expropriation clause is without consequence.

In the early days of NAFTA Chapter Eleven, several investors argued that the "measures tantamount to" language in Art. 1110 significantly broadened the scope of that provision. Some of the early tribunals under Chapter Eleven rejected that argument outright. For instance, in an early award the Pope & Talbot tribunal stated:

"the Tribunal does not believe that the phrase "measures tantamount to nationalization or expropriation" in Article 1110 broadens the ordinary concept of expropriation under international law",

and that

"The Tribunal is unable to accept the Investor's reading of Article 1110. "Tantamount" means nothing more than equivalent. Something that is equivalent to something else cannot logically encompass more. No authority cited by the Investor supports a contrary conclusion."

The S.D. Myers tribunal subsequently stated that it:

"agrees with the conclusion in the Interim Award of the Pope & Talbot Arbitral Tribunal that something that is “equivalent” to something else cannot logically encompass more. In common with the Pope & Talbot Tribunal, this Tribunal considers that the drafters of the NAFTA intended the word “tantamount” to embrace the concept of so-called “creeping expropriation”, rather than to expand the internationally accepted scope of the term expropriation."

[Simon Lester]

Anon99,

Thanks, I was not aware of any of that. My limited knowledge of investment rules has been exposed!

It does seem to me, though, that if the U.S. were to begin using the language quoted above, rather than the current standard language in U.S. FTAs, it could have some impact. Take, for example, the U.S. - Morocco FTA language on this issue:

"Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”), ..."

http://www.worldtradelaw.net/fta/agreements/usmorfta.pdf

If you suddenly got rid of both "directly or indirectly" and "measures equivalent," that could have an effect. However, maybe you would also need some sort of formal clarification explaining the goal of the change in order to make sure a tribunal got the point.

[Anon99]

I wonder if there is an analogy with the interpretative problem that arose in the very different context of Arts. 3.1(a) and (b) of the SCM Agreement. Art. 3.1(a) prohibits subsidies "contingent, in law or in fact, ... upon export performance". Article 3.1(b) prohibits subsidies "contingent ... upon the use of domestic over imported goods". That is, Art. 3.1(a) contains the words "in law or in fact", but these words are omitted from Art. 3.1(b). There are two possible ways to read the omission of the words "in law or in fact" in Art. 3.1(b). The first, which is how the P in Canada - Autos read it, is that the inclusion of the words "in law or in fact" in Art. 3.1(a) must mean that this provision has a broader scope in this respect than Art. 3.1(b). The second, which is how the AB read it, and which is how I read it, is that the words "in law or in fact" in Art. 3.1(a) merely clarify for greater certainty - and do not alter (i.e. broaden) - the meaning of "contingent".

This is how I read the "tantamount to" and "directly or indirectly" language in expropriation clauses: this language only serves to clarify - and does not alter - the concept of "expropriation".

[Simon Lester]

The one point I would offer against that view is that in 3.1(a) there is a footnote after "in fact," and this footnote gives a bit of explanation regarding "in fact" export subsidies. Arguably, the inclusion of "in law or in fact" in 3.1(a) was designed to create an anchor for the footnote, and thus the absence of the same language in 3.1(b) did not mean that the only 3.1(b) subsidies covered were "in law" ones. Thus, the existence of the footnote in the 3.1(a)/3.1(b) context may make the expropriation/tantamount/equivalent issue somewhat different.

[Perry Bechky]

Norway's official commentary on its model BIT sheds some light here. It provides (in part):

"The expropriation provision must provide effective and intentional investor protection, while safeguarding the regulatory freedom of the state. The aim of an expropriation provision is to protect established investments from open or camouflaged expropriation. The provision must at the same time safeguard the state’s right to implement general regulations and administrative decisions without incurring liability to pay compensation. The challenge involves finding the correct point of intersection between regulation/intervention by the authorities that is deemed to be expropriation (and thus gives rise to claims for compensation) and the measures that fall outside this category.

"According to customary public international law, expropriation does not only occur when the property right is taken by force (nationalization/expropriation), but also if major and long-term limitations are placed on the property right (indirect expropriation). Such measures must moreover be taken in accordance with national law, be in the public interest, be non-discriminatory and involve payment of compensation."

I take from the references to "camoflauged expropriation" and "indirect expropriation" that Norway does not mean to limit this provision to direct expropriation. That said, it is also clear that Norway intends to limit claims of indirect expropriation so as to preserve the state's regulatory prerogatives. In this regard, Norway's approach seems to be of a piece with the 2004 US Model BIT, where Annex B, Section 4(b) provides, "Except in rare circumtances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations." The Canadian Model BIT from 2004 (Annex B.13(1)(c)) is to the same effect with an example of the rare circumstances: "such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith."

So the current practice of (at least these three) states seems to recognize the principle that the word "expropriation" in customary law includes indirect and creeping expropriations, while simultaneously trying to limit the circumstances in which this principle may be invoked.

With best regards.

--Perry.