I.

Introductory note

This concept refers to taking of a property belonging to an investor by the State, which, if
unlawful, triggers the international responsibility of the state. 1 The treaty practice is that most
investment agreements virtually envisage this concept but do not give a definition of it. 2 They
usually provide that the meaning of expropriation is to be decided in accordance with
international law.3 As such, arbitration tribunals tend to interpret the concept according to
international law since it is not defined in most investment agreements and it is considered as
deriving from customary international law.4 Expropriation can either be direct or indirect. In
the former, there is mandatory legal transfer of title to the property or outright seizure while
the latter occurs when the property is otherwise destroyed or the owner is deprived of its
ability to manage, use or control its property in a meaningful way.5

Under this concept, this paper discusses the various contemporary areas of concern. It
elucidates on the various positions adopted especially by arbitration tribunals vis a vis the
interpretation, understanding and application of this concept in international investment law
(IIL).

II. What constitutes an expropriation?

The question of identifying and delimiting compensable expropriation from lesser (or
justified) interferences by a state has been a long-standing issue under IIL. 6 Tribunals have
developed a wide scope of state interferences that constitute an expropriation or rather have
tantamount effect to investments. For instance, in Compañiá del Desarrollo de Santa Elena,
S.A. v. Costa Rica7 a direct state decree was found to constitute an expropriation, same case
for denial or revocation of permits, licenses or concessions in Middle East Cement Shipping
and Handling Co. S.A. v. Egypt.8

1
Johanne M Cox, Expropriation in Investment Treaty Arbitration (Oxford Oxford University Press 2019) (Cox)
2
ibid, Cox - mulrilateral and bilateral investment agreements use terms such as: ‘deprivation,’ ‘dispossession,’
‘taking,’ ‘privatisation,’ et cetera
3
ibid, Cox
4
Schreuer, C., The Concept of Expropriation under the ECT and Other Investment Protection Treaties,
(Transnational Dispute Management, 2005)
5
ibid
6
ibid
7
Compañiá del Desarrollo de Santa Elena, S.A. v. Costa Rica (2000)
8
Middle East Cement Shipping and Handling Co. S.A. v. Egypt (2002); See also, Técnicas Medioambientales
Tecmed S.A. v. México (2003); Goetz v. Burundi (1999)
The most important element is intensity of the interference with the investment. The tribunal
in Metalclad Corp. v. Mexico9 held that expropriation under NAFTA includes 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. 10 In Glamis Gold v.
United States11 it was held that the threshold examination is an inquiry as to the degree of the
interference with the property right.12

Further, deprivation can exist despite there being no obvious benefit to the state concerned.
This was the position adopted by the tribunal in Rumeli Telekom A.S. v. Kazakhstan.13 It is
also deponed that the intent of the intent of a state to expropritate is irrelevant.14

III. Expropriation and breach of contracts

Tangible and intangible rights can be expropriated.15 Contemporary tribunals have included
contractual rights within the scope of expropriatable objects. The breach by a State of a
contract does not as such entail a breach of international law. Something further is required
before international law becomes relevant, such as a denial of justice by the courts of the
State in proceedings brought by the other contracting party.16 In Impregilo S.p.A. v. Pakistan17
it was stated that the alleged breach of contract must be the result of behaviour going beyond
that which an ordinary contracting party to a BIT could adopt.18

The mere non-performance of a contractual obligation is not to be equated with a taking of

property, nor (unless accompanied by other elements) is it tantamount to expropriation. In
Waste Management, Inc. v. Mexico (II)19 the tribunal concluded that it is one thing to
expropriate a right under a contract and another to fail to comply with the contract.
Noncompliance by a government with contractual obligations is not the same thing as, or
equivalent or tantamount to, an expropriation.20

9
Metalclad Corp. v. Mexico (2000)
10
ibid, para. 103
11
Glamis Gold v. United States (2009)
12
ibid, para. 356-357
13
Rumeli Telekom A.S. v. Kazakhstan (2008) para. 707
14
Siemens v Argentine Republic (2007) para. 270
15
Wema Hotels ltd. V Egypt, Award (8 Dec. 2000) para. 98
16
Commentaries to the Draft Articles on Responsibility of States for Internationally Wrongful Acts (2001), p. 87.
17
Impregilo S.p.A. v. Pakistan (2005)
18
ibid, para. 270
19
Waste Management, Inc. v. Mexico (II) (2004)
20
ibid, para. 174-175
III. Expropriation and the evolving doctrine of police powers21

As a matter of general international law, a non-discriminatory regulation for a public purpose,

which is enacted in accordance with due process and, which affects, inter alios, a foreign
investor or investment is not deemed expropriatory and compensable. 22 The point of concern
is actions taken by the state which affect investment interests to a similar degree of
deprivation but nevertheless are not classified as expropriations. It was observed in Saluka
Investments BV (The Netherlands) v. Czech Republic,23 that international law is yet to identify
in a comprehensive and definitive fashion precisely what regulations are considered
“permissible” and “commonly accepted” as falling within the police or regulatory power of
States and, thus, noncompensable.24

Summarily, in 2016, the tribunal in Phillip Morris v Uruguay25 developed a test that a state’s
exercise of police powers has to be measured against. It held that order for a State’s action in
exercise of regulatory powers not to constitute indirect expropriation, the action has to
comply with certain conditions. Among those most commonly mentioned are that the action
must be taken bona fide for the purpose of protecting the public welfare, must be non-
discriminatory, adopted in good faith and proportionate to the objective meant to achieve.26

21
The doctrine of police powers posits that States are not liable to pay compensation when, in the normal
exercise of their regulatory power, they adopt non-discriminatory, bona fide regulations that are aimed at the
general welfare – see, Kinnear, M., Fischer, G.R., Mínguez Almeida, J., Torres, L. and Bidegain, M., ‘Chapter
32: Police Powers or the State's Right to Regulate,’ in ‘Building International Investment Law: The First 50
Years of ICSID,’ (Kluwer Law International, 2015)
22
Methanex v. United States (2005), IV D para. 7.
23
Saluka Investments BV (The Netherlands) v. Czech Republic, UNCITRAL (2006)
24
ibid, para. 263
25
Phillip Morris v Uruguay (2016)
26
ibid, para. 305-307