Indirect expropriation of investments – the legal benchmarks

In my previous article, I wrote about the existing legal framework in Tanzania on the protection of investments against expropriation. This article discusses the expanded scope of the concept of expropriation of investment. Recent arbitration awards of International Centre for Settlement of Investments Disputes (ICSID) highlights the expanded dimension of what, from perspectives of the law, constitutes “expropriation of investment”.

In the context of investment law, the term “expropriation” generally refers to an act of the government or its agency taking control over the private property for a purpose deemed to be in the public interest. In certain isolated cases, expropriation may also refer to the taking of private property by a private entity authorized by a government to take property in certain situations.

Traditionally, the concept of expropriation used to refer to actual taking of the control of the operations and management of a particular business venture. This restricted meaning of “expropriation” is no longer exhaustive based on the review of recent arbitration decisions on investment disputes between States and investors.

A quick investigation on various arbitral awards in the investment disputes such as those in Metalclad Corp. v. United Mexican States (ICSID Case No. ARB(AF)/97/1); SPP v. Egypt; and Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22 informs that the term “expropriation” has been significantly amplified and expanded. It now does not only refer to “the actual taking” of the management functions of the investment entity; but rather it encompasses government measures which may be deemed to have effect equivalent to ... expropriation”. These measures may relate to certain regulatory and policy measures or a form of interference which would practically deter the capability of the investment venture to function properly in a certain economic set up. These forms of interference have come to be known as “indirect, creeping or de facto” expropriation.

The pertinent question that arises is--to what extent a government should be allowed to regulate business operations either generally or by specific actions in the context of general regulations, for a legitimate public purpose without substantially effecting the operations of the venture? The answer to this question hinges on the legal definition ascribed to the term “expropriation”. As I pointed out in my previous article, there are two types of investment expropriation -- direct and indirect. Having a wholesome definition of the term expropriation will thus determine whether certain acts of the government are actionable or not. Therefore, it is a surprise that in recent international investment disputes between government and investors, the issue of definition of expropriation has become dominant.

Despite a number of decisions of international tribunals, the line between the concept of indirect expropriation and governmental regulatory measures not requiring compensation has not been clearly articulated and depends on the specific facts and circumstances of the case. However, while case-by case approach remains necessary, there are some criteria emerging from the examination of some international agreements and arbitral decisions for determining whether an indirect expropriation requiring compensation has occurred.

International law is clear that a seizure of legal title of property constitutes a compensable expropriation. On the other hand, under international law, not all state measures interfering with private property are deemed as expropriation. Thus, state measures, which are prima facie lawful in the exercise of powers of governments, may affect foreign investment interests considerably without amounting to expropriation. Thus, foreign assets and their use may be subjected to taxation, trade restrictions involving licences and immigration quotas or measures of devaluation. While special facts may alter cases, in principle such measures are not unlawful and do not constitute expropriation”.

In addition, non-discriminatory measures related to anti-trust, consumer protection, securities, environmental protection, land planning may be deemed non-compensable takings since they are regarded as essential to the efficient functioning of the state.

As mentioned above, there is no generally accepted and clear definition of the concept of indirect expropriation and what distinguishes it from non-compensable regulation, although this question is of great significance to both investors and governments.

Setting up clear benchmarks on what are compensable and that which is not compensable interference of investment is crucial. To the investor, the line of demarcation between measures for which no compensation is due and actions qualifying as indirect expropriations that require compensation may well make the difference between the burden to operate or otherwise abandon a non-profitable enterprise and the right to receive full compensation (either from the host State or from an insurance contract. On the part of the government, the definition determines the scope of the State’s power to enact legislation or adopt a policy that regulates the rights and obligations of investors in cases where compensation may fall due. Therefore, it may be argued that the Government will be prevented from taking any such compensable measures where these cannot be covered by the available public financial resources.