Direct expropriation is the transfer of title to property from one legal subject to another by an official act, and/or the outright seizure of private property.
While direct expropriation does occur in practice from time to time, investors often invoke indirect expropriation, through the impairment of usage, controlling or performance possibilities or generally a significant loss of value of the investment. Principally, any state measure can influence the value of an investment. The materialisation of a risk ordinarily related to a business venture does not amount to an expropriation. Indirect expropriation cases therefore warrant particular scrutiny.
Drawing the dividing line between expropriation and legitimate administrative regulation will typically depend on a number of factors. One key aspect will be the severity of the impact on the owner’s legal status, namely the ability to use, enjoy, control and freely dispose of his or her investment. Another factor to be considered may be to what extent the State measure specifically targeted the investment in question and/or whether the impact on the investment was merely incidental-
Contrary to widespread belief, BITs do not prohibit expropriation. Instead, expropriations are, as under many national laws, legally possible if the State in question has acted in the public interest, in a non-discriminatory manner, based on the principles of legality and due process, and accompanied by a compensation.
The compensation requirement has been inherent to many national legal orders for centuries. By way of illustration, in Germany, Prussia first codified this principle in its 1794 General Code of the Law of the Land, and the corresponding provision is still applied by the German courts in certain expropriation cases. The general principle is now enshrined in Article 14(3) of the German Constitution. Against this backdrop, the public debate on the supposedly excessive remedies of foreign investors under BITs appears somewhat out of touch with reality.
By way of illustration:
- An expropriation or taking for environmental reasons may be classified as a taking for a public purpose, and thus may be legitimate.
- That does not affect either the nature or the measure of the compensation to be paid for the taking.
- Put differently, the purpose of protecting the environment for which the Property was taken does not alter the legal character of the taking for which adequate compensation must be paid (sole effects doctrine).
The conceptual basis of the compensation requirement is that the investor is forced to sacrifice his or her investment for the greater good. Therefore, legitimate and proportionate sanctions with a criminal or similar character are not covered by the compensation requirement and may, to the extent that any other applicable conditions are met, lead to dispossession without the need for compensation to be paid.
If compensation is to be paid, it should be proportional to the value of the expropriated investment on the last moment before the expropriation, nationalization or other measure became publicly known.
It is now widely accepted that compensation must be immediate, meaning without delay, and applying usual bank interest until the time of payment; therefore, it shall be effectively realisable and freely transferable.
Even a legitimate, non-discriminatory regulation might require compensation if an individual investor is required to make a special sacrifice, i.e. giving up legitimate expectations for enjoying his investment-backed property, for the benefit of the society at large.
Relevant Experience of BODENHEIMER Attorneys
Axel Benjamin Herzberg and Dr Rouven F Bodenheimer routinely advise both, investors and governments on international investment law issues. Mr Herzberg also handled a number of ISDS cases as Deputy Counsel at the Secretariat of the ICC International Court of Arbitration in Paris.
Dr Nicolas Klein worked for German Federal Constitutional Court Justice Professor Dr Andreas Paulus, himself a renowned public international law specialist who represented Germany, inter alia, before the International Court of Justice in the LaGrand case against the United States. Both, Dr Klein’s doctoral thesis and his LL.M. studies at Columbia University (New York) revolved around issues of international investment law, in particular the scope of application ratione personae of bilateral investment treaties.
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