Thesis
Reference
Compensation for Regulatory Expropriation in International Investment Law
KHACHVANI, David
Abstract
The States, international organizations and interest groups are increasingly concerned with treaty claims of foreign investors, who sometimes seek compensation for the States' legitimate regulatory measures, such as tobacco plain packaging, nuclear energy phase out and environmental regulations. International investment law has yet to develop a comprehensive and predictable framework addressing some of the basis questions related to compensability of legitimate regulatory measures. The thesis carries out a comparative legal analysis to identify the key features of the prohibition of uncompensated expropriation as a general principle of law, and explores the rationale of that principle in political philosophy.
Equipped with the results of this analysis, it proceeds to propose an analytical approach addressing practical questions related to the compensatory protection of foreign investments.
KHACHVANI, David. Compensation for Regulatory Expropriation in International Investment Law. Thèse de doctorat : Univ. Genève, 2021, no. D. 1016
DOI : 10.13097/archive-ouverte/unige:154019 URN : urn:nbn:ch:unige-1540192
Available at:
http://archive-ouverte.unige.ch/unige:154019
U
NIVERSITY OFG
ENEVA GENEVA |11 JUNE 2021_____________________________________________________________________________
COMPENSATIONFORREGULATORYEXPROPRIATION ININTERNATIONALINVESTMENTLAW
_____________________________________________________________________________
DAVID KHACHVANI
TABLE OF CONTENTS
INTRODUCTION... 5
A. METHODOLOGY ... 10
B. STRUCTURE ... 12
I. NORMATIVE FOUNDATIONS ... 14
A. INTERPRETATIVE ROLE OF GENERAL PRINCIPLES OF LAW (GPL) ... 15
B. PROHIBITION OF UNCOMPENSATED EXPROPRIATION AS A GPL ... 20
i. Common law ... 24
ii. Germanic civil law ... 31
iii. Romanistic (Napoleonic) civil law ... 37
iv. Far Eastern law ... 43
v. Islamic law ... 45
vi. Nordic law ... 47
C. INTERIM CONCLUSIONS ... 58
II. ETHICAL FOUNDATIONS ... 62
A. NATURAL RIGHT TO PROPERTY AND LIBERTARIANISM ... 63
B. EGALITARIANISM ... 72
C. UTILITARIANISM... 87
III. OBJECT OF EXPROPRIATION ... 94
A. UNITARY INVESTMENT AS AN OBJECT OF EXPROPRIATION ... 97
B. TOWARD A NUANCED APPROACH: DEPRIVATION OF RIGHTS ... 117
C. INTERESTS CAPABLE OF BEING EXPROPRIATED ... 135
i. Ownership... 154
ii. Non-ownership interests in rem ... 155
iii. Intellectual property ... 159
iv. Contracts ... 164
v. Public law concessions ... 184
vi. Legitimate expectations ... 195
vii. Shareholder rights ... 201
viii. Virtual property ... 207
D. INTERIM CONCLUSIONS ... 213
IV. NON-COMPENSABLE REGULATION ... 219
A. POLICE AND REGULATORY POWERS V.REGULATORY EXPROPRIATION ... 224
B. CRITERIA OF VALIDITY ... 256
C. BURDEN OF PROOF AND STANDARD OF REVIEW ... 267
D. COMPENSABILITY OF CLIMATE CHANGE REGULATIONS ... 274
E. INTERIM CONCLUSIONS ... 280
V. STANDARD OF COMPENSATION ... 284
A. PRIMARY DUTY OF COMPENSATION AS A CONDITION OF LAWFULNESS ... 285
B. SECONDARY DUTY OF COMPENSATION AS A MODALITY OF REPARATION ... 292
C. INTERIM CONCLUSIONS ... 314
CONCLUDING REMARKS ... 317
BIBLIOGRAPHY ... 322
INTRODUCTION
The Compensation Clause is designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.
Armstrong v. United States, 364 U.S. 40 (1960)
This work addresses some of the most fundamental questions that arise in relation to the protection of foreign investments against States’ regulatory measures. In particular, it focuses on the nature and scope of compensability of regulatory expropriation under the expropriation provisions contained in most of over three thousand international investment agreements (“IIAs”). Before proceeding further, it is important to offer an initial definition of the term “regulatory expropriation” in this context. While this notion will be analyzed in detail throughout this work, for the introductory purposes it suffices to clarify that regulatory expropriation refers to legitimate sovereign measures that (i) proscribe, limit or otherwise regulate a foreign investor’s exercise of the rights over its investment(s), and (ii) have a substantial adverse effects on such investment(s), in that they render the investor’s rights over the investment(s) impossible or economically unviable to exercise.
The reference to “legitimate” measures in this context is meant to narrow the focus of this work to regulatory measures that meet the basic requirements of substantive and procedural fairness that are often conceptualized under a broader notion of the rule of law.1 In other words, the main focus of this work is not the consequences of States’ abuse of power by arbitrary, irrational, discriminatory or procedurally unfair measures. Instead, the objective is to address cases in which the States regulate in public interest, even-handedly and with due process; yet the measures have
1 For the discussion of the general requirements applicable to the exercise of the State’s powers see, Bingham, The Rule of Law (Allen Lane Publishing, 2010) Part 6; See also, Schill, “International Investment Law and the Rule of Law” in Lowell, Thomas, Zyl Smit (eds.), Rule of Law Symposium 2014: The Importance of the Rule of Law in Promoting Development (Singapore: Academy Publishing, 2015) 81-102.
such effects on the rights and interests of a foreign investor that the State should be required to provide compensation.
The topic of compensability of the States’ legitimate regulatory measures attracts a considerable attention not only among scholars and practitioners of investment arbitration, but also in the community of States, international and non-Governmental organizations and wider interest groups that often vouch for the protection of public health and the environment. The proposition that the States can be held liable to compensate foreign investors for an abusive conduct, such as political favoritism, arbitrariness, discrimination, or denial of justice does not appear to raise a fundamental controversy, and is thought to even promote to the development of the rule of law.2 In turn, the public is wary when the news emerge about investors claiming significant amounts of compensation for legitimate regulatory measures, such as the laws on tobacco plain packaging, nuclear energy phase-out, renewable energy reforms and more recently even the measures designed to tackle the COVID-19 pandemic.3 These and other similar concerns boil over into what is often called the legitimacy crisis in investor-State dispute settlement.4
Against this backdrop, it is striking that international investment law has yet to broach the most fundamental issues that arise in relation to the compensability of legitimate regulatory measures.
As detailed in the relevant Parts below, jurisprudence of investment treaty tribunals has not yet elaborated a comprehensive set of criteria that would help distinguish a non-compensable exercise of States’ regulatory and police powers from a legitimate but compensable regulatory
2 See, Schill, “International Investment Law and the Rule of Law” in Lowell, Thomas, Zyl Smit (eds.), Rule of Law Symposium 2014: The Importance of the Rule of Law in Promoting Development (Singapore:
Academy Publishing, 2015) 81-102.
3 See, various reports of investor-State disputes by the media and interest groups; nuclear energy phase-out:
https://www.world-nuclear-news.org/NP-Germany-to-compensate-utilities-for-nuclear-phaseout-losses- 24051801.html; Tobbaco plain packaging: https://tobaccotactics.org/wiki/philip-morris-vs-the- Government-of-uruguay/; https://ncdalliance.org/news-events/news/uruguay-adopts-tobacco-plain- packaging; Renewable energy reforms: https://www.reuters.com/article/us-spain-renewables/exclusive- foreign-investors-set-to-sue-spain-over-energy-reform-idUSBRE91D1A020130214; COVID-19 measures: https://globalarbitrationreview.com/article/1225319/peru-warned-of-potential-icsid-claims- over-covid-19-measures.
4 See, Schill, “General Principles of International Law and International Investment Law” in Gazzini and Brabandere (eds.) International Investment Law: Sources of Rights and Obligations (Brill 2012) 136.
expropriation.5 Similarly, investment tribunals remain divided on whether the expropriation provisions should exclusively protect property rights or also other sorts of economic interests of foreign investors.6 The standard of compensation for investments that lose their economic utility as a result of the State’s legitimate regulatory measures is also riddled with several imprecisions.7 The unsettled practice on these fundamental questions amplifies the role of investment treaty tribunals by affording them a nearly unfettered discretion to qualify essentially any set of legitimate regulatory measures as an expropriation and thus require the State to provide compensation. This contributes to the lack of predictability for the States and investors alike, and exacerbates the ongoing backlash against the investor-State dispute settlement system in general.
This tension is only bound to escalate further as States take up increased regulatory functions, partly due to the global paradigm shift away from the neoliberal economic policies, and partly because of unique challenges that the regulators face around the world, such as climate change, recurring global health crises and the profound impacts of the emerging data-based economy.8 The reason why this work focuses on the issue of compensability of regulatory measures specifically under the expropriation standard – as opposed to other standards of treatment contained in IIAs – is the unique nature of the duty of compensation that attaches precisely to the exercise of the State’s power to expropriate. The States’ sovereign power “to appropriate private property for public use is unquestioned”.9 However, this power is limited. As with the exercise of any other power, the State is under a duty to act for legitimate public objectives, as opposed to
5 Infra Part IV; Saluka Investments B.V. v. Czech Republic, UNCITRAL, Partial Award, 17 March 2006, para. 263 (“International law has 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, non-compensable.”)
6 Infra Part III.
7 Infra Part V.
8 See, Jacobs & Laybourn-Langton, “Paradigm Shifts in Economic Theory and Policy”, Intereconomics Volume 53, 2018 · Number 3 · pp. 113–118; “Data-Driven Innovation: Big Data for Growth and Well- Being.” Paris, OECD Publishing (2015) https://read.oecd-ilibrary.org/science-and-technology/data- driveninnovation_9789264229358-en.
9 Upton Case, US-Venezuela Mixed Claims Commission, 17 February 1903, Reports of International Arbitral Awards, 236.
arbitrary, discriminatory or irrational considerations, and to respect due process of law. In addition to these “standard” requirements of substantive and procedural fairness that are applicable to any exercise of the State’s sovereign powers,10 expropriatory measures somewhat uniquely also entail a duty of payment of compensation. In fact, a fuller version of the quote used in this paragraph reads as follows:
The right of the State to appropriate private property for public use is unquestioned, but always with the corresponding obligation to make just compensation to the owner thereof.11
As detailed in the relevant Part below, this requirement of compensation is a primary duty and should be distinguished from the secondary duty of compensation, which is a modality of reparation.12 When a State takes expropriatory measures, it is required to provide compensation as a condition of lawfulness of the expropriation and not as a consequence of an unlawful conduct.
This requirement of compensation is not a modality of the secondary duty of reparation, which arises as a consequence of the State’s unlawful conduct. Since States have a sovereign power to expropriate, expropriation does not give rise to the secondary duty of reparation, unless the State fails to comply with any of the requirements of legality of expropriation, one of such requirements being precisely the primary duty of compensation.
Thus, at a closer look, the essential content of the expropriation standard can be distilled to one key obligation; namely that of compensation. Indeed, the limitations other than the duty of compensation, such as public purpose, non-discrimination and due process are by no means particular to expropriatory measures, but apply to any type of exercise of the State’s sovereign
10 For the discussion of the general requirements applicable to the exercise of the State’s powers see, Tom Bingham, The Rule of Law, Allen Lane Publishing, Part 6; See also, Waste Management Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, 30 April 2004, para. 98; GAMI Investments, Inc. v. United Mexican States, UNCITRAL/NAFTA Award, 15 November 2004, paras. 90-91.
11 Upton Case, US-Venezuela Mixed Claims Commission, 17 February 1903, Reports of International Arbitral Awards, 236.
12 Ago, The Second Report on State Responsibility: The Origin of International Responsibility, A/CN.4/233 (1970), para. 7.
powers.13 In turn, not all legitimate measures require compensation, but only those that constitute an expropriation. Tellingly, under many domestic laws, the constitutional standard of expropriation is formulated precisely and primarily as a requirement of compensation.14
In the context of IIAs, the existence of the primary duty of compensation is unique to the expropriation standard. Other standards of treatment, such as national treatment (“NT”), most- favored-nation treatment (“MFN”) and most importantly, fair and equitable treatment (“FET”) do not require provision of compensation as a primary duty.15 Thus, when examining the compliance of a particular measure with, for instance, the FET standard, a finding that the measure is legitimate in principle ends the inquiry.16 In contrast, when testing the same measure under the expropriation standard, the legitimacy of the measure will not suffice to avoid the duty of compensation. If the measures are found to be expropriatory, the State will need to have provided prompt and adequate compensation even if the measure were legitimate. The tribunal in Mamidoil v. Albania articulated this point as follows:
[I]llegal conduct will not give rise to a claim for expropriation (though it may ground a different claim) if the substance and attributes of property are left intact. Conversely, legal conduct may be expropriatory if the essence of property is touched, as set out above, and no compensation is paid.17
13 Montt, State Liability in Investment Treaty Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Hart Publishing 2012)162-81.
14 Infra Part I; See, most famously, Fifth Amendment to the Constitution of the United States of America (1789).
15 Under these other standards of treatment, the duty of compensation will only arise as a modality of the secondary obligation of reparation only if the violation of the standard is established. Thus, the duty of compensation is not a condition of legality.
16 It is true that measures may entail responsibility under the FET standard if they contradict investor’s legitimate expectations, i.e. where the state acts in contravention with its earlier specific promise with respect to the investment. A breach of such promises is however construed as a violation of the principle of good faith and thus renders the State’s conduct unfair. Thus, in this case compensation acts as a secondary remedy and not as a condition of legality.
17 Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Republic of Albania, ICSID Case No.
ARB/11/24, Award, 30 March 2015, para. 571.
Therefore, the primary compensatory protection that the expropriation standard accords to foreign investments distinguishes this standard from other standards of treatment encountered in IIAs. It is precisely this compensatory regime that is capable of encumbering the States’ legitimate regulatory measures with the duty of compensation. This is why a particular tension arises between the States’ power to regulate in the public interest and their obligation not to expropriate foreign investments without compensation.
The purpose of this thesis is to tackle several key aspects of this tension. In particular, the focus is on determining what categories of interests of foreign investors should be protected by the primary compensatory regime of the expropriation standard, as well as on identifying criteria that can coherently distinguish non-compensable regulation from compensable regulatory expropriation.
The thesis also revisits the standard of compensation to identify the principles of compensation that take into account specificities of regulatory expropriation.
A. METHODOLOGY
The expropriation provisions contained in IIAs are often termed in a generic language.18 While some relatively recent treaties contain a definition of expropriation, such definitions seldom provide a comprehensive guidance for resolving the salient issues that arise with respect to regulatory expropriations.19 In this work, I take the generic language of the expropriation standard as seen in most IIAs and attempt to carry out an interpretative analysis, with the aim of finding answers to the key questions that arise with respect to the States’ duty to provide compensation for regulatory expropriation. I adopt two principal interpretative methods – systemic and teleological – that are both accepted means of treaty interpretation under the Vienna Convention on the Law of Treaties (“VCLT”).
18 See, e.g., Article 13 of the ECT (“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.”)
19 See, e.g., Section 1(b) of Annex 8-A to the EU-Canada Comprehensive Economic and Trade Agreement (2017) (“CETA”).
The VCLT mandates the interpretation of treaty terms in good faith, pursuant to their ordinary meaning, in their context and in light of the treaty’s object and purpose.20 Article 31(3)(c) then lays out the rule, which is sometimes called the rule of systemic integration of treaties. It mandates the interpreter to consider “together with the context: […] [a]ny relevant rules of international law applicable in the relations between the parties.” The reference to “relevant rules of international law” encompasses the sources of international law, which includes general principles of law. As the detailed analysis in the relevant part below makes it clear, the prohibition of uncompensated expropriation is precisely one such general principle, which primarily emerged in the context of domestic constitutional and administrative laws.21 Understanding the roots and basic features of this principle is key to analyzing and systemically interpreting the expropriation standard contained in the IIAs. Following the rule of systemic integration, this thesis conducts a comparative analysis of major legal systems to identify and distill the essential characteristics of the principle of prohibition of uncompensated expropriation.22
In addition, the VCLT mandates a teleological interpretation of treaty terms in reference to the object and purpose of the applicable treaty. However, the apparent preambular objectives that IIAs often refer to, such as the promotion of foreign investment and cross-border flow of capital, while certainly relevant, provide only limited guidance for resolving complex questions that arise in respect to specific standards of treatment. To gain a deeper understanding of the purpose that the expropriation standard serves in international investment law, it is important to inquire into the economic, ethical and normative foundations of the principle of prohibition of uncompensated expropriation. To this end, this thesis carries out the analysis of the rationale for the primary duty of compensation in legal and political philosophy.23
Equipped with the understanding of the systemic and philosophical underpinnings of the expropriation standard, the work then proceeds to tackle the most pressing questions related to the compensatory protection of foreign investments and the States’ power to regulate in public interest.
20 Article 31 of the Vienna Convention on the Law of Treaties (1969) (“VCLT”).
21 Infra Part I.
22 Infra Part I.
23 Infra Part II.
B. STRUCTURE
This thesis is divided into five parts. The first two parts, which delve on the scope, content and foundations of the principle of prohibition of uncompensated expropriation, lay the analytical groundwork for the last three, which tackle the practical legal questions that arise in relation to regulatory expropriations in international investment law and arbitration. More precisely, the thesis is structured as follows:
Part I carries out a comparative analysis of major legal systems in order to identify and distill the essential scope of the general principle of prohibition of uncompensated expropriation.
Recognizing that the expropriation standard found its way into IIAs precisely from the widely recognized municipal legal principle of protection of property from uncompensated public encroachment, the comparative analysis of this principle aims to set out analytical benchmarks for the expropriation standard and its interaction with the State’s regulatory powers.
Part II continues to inquire into the scope and content of the principle of prohibition of uncompensated expropriation. Unlike Part I, however, the analysis goes beyond the positive law.
It delves into the ethical and philosophical rationale of the prohibition of uncompensated expropriation in political and legal theory. As the analysis makes it clear, the foundations of the duty of compensation for expropriation that are traced to the basic notions of distributive justice and utilitarian ethics bode well with the objectives of the system of protection of foreign investments and shed a unique light on the critical legal issues that arise in respect of regulatory expropriations.
With the analytical background laid down in the two initial parts, Part III then proceeds to tackle one of the fundamental questions that arises in relation to the expropriation standard in international investment law. Namely, it analyzes whether the scope of the expropriation standard, and more importantly the primary compensatory protection that it envisages, covers only property interests, as opposed to other types of economic interests of foreign investors. The analysis addresses the questions of applicable law and sets out the criteria that can be used to determine whether a particular interest that comprises an investment is capable of being expropriated. These
criteria are then applied to commonly encountered categories of interests in investment treaty arbitration, as well as to emerging types of interests such as big data, cryptocurrencies and other virtual assets.
Part IV addresses the question of a non-compensable exercise of the States’ police and regulatory powers. By reference to the normative and ethical foundations of the principle of compensation for expropriation, it offers an analytical distinction between non-compensable regulation and compensable regulatory expropriation. The analysis highlights different distributive and utilitarian consequences that these two distinct types of regulations entail. It then goes on to explain why foreign investors need not be protected by compensatory regime of the expropriation standard against regulatory measures that the States legitimately take in order to adapt to changed and newly emerging circumstances.
Part V clarifies several aspects pertaining to the different standards of compensation that applies to the State’s abuse of its power to expropriate as opposed to legitimate regulatory expropriation.
The analysis reveals fundamental reasons why regulatory expropriations do not entail compensation for consequential loss that investors may sustain as a result of new regulations. It also highlights information costs and the resulting procedural particularities of enforcing the States’ duty to provide compensation in cases of regulatory expropriation.
* * *
I. NORMATIVEFOUNDATIONS
This Part explores the normative foundations of the expropriation standard. In particular, it inquires into the existence and scope of a general principle of prohibition of uncompensated expropriation.
General principles of law (“GPL”) are one of the formal sources of international law along with customary and conventional international law.24 Unlike these latter sources, however, GPLs primarily refer to principles developed in the context of municipal laws.25 As the Special Rapporteur of the International Law Commission (“ILA”) points out:
That general principles of law as a source of international law can arise from national legal systems finds support in the travaux of the Statute of the Permanent Court of International Justice, and in particular the work of the Advisory Committee of Jurists, where there was general agreement that general principles of law were those found in foro domestico.26
International courts and tribunals have recognized as a GPL various procedural and substantive legal principles developed in the context of contract, tort, property, administrative, constitutional and corporate laws. Examples include good faith, legal certainty, res judicata, clean hands doctrine and corporate separability, to name a few.27
24 Article 38(1) of the Statute of the International Court of Justice (1946) (the “ICJ Statute”) refers to general principles of law recognized by civiized nations, it is now widely accepted that the reference to “civilized nations” is no longer pertinent, as all States of international community should be considered as civilized.
“Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 0.01;
25 Kotuby and Sobota, General Principles of Law and International Due Process: Principles and Norms Applicable in Transnational Disputes (Oxford University Press 2017) 2; Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 1.33.
26 Vázquez-Bermúdez, First Report on General Principles of Law by Special Rapporteur, International Law Commission Seventy-first Session (Geneva, 29 April – 7 June and 8 July – 9 August 2019) 190.
27 Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain), ICJ Judgment, 5 February 1970, 37.
Recently, GPL have attracted an increased attention from investment treaty tribunals and scholars.28 The authors who have studied GPL in the context of investment arbitration almost unanimously emphasize, however, that GPL remain underexplored and unduly overlooked in international investment law.29
This Part examines whether the prohibition of uncompensated expropriation can be considered a GPL, and if so, whether such principle and its content could assist with interpreting the expropriation standard contained in the IIAs. I will first explore the role that the GPLs play in the interpretation of treaty terms under international law (A). Second, I will look into the established methodology for the identification and distillation of GPLs in international law and apply that methodology to the prohibition of uncompensated expropriation (B). Once the relevant GPL is identified, I will offer several interim conclusions (C), which I will then apply in the subsequent Parts in order to address more pressing practical questions of investment arbitration, such as what type of interests are capable of being expropriated30 and where one could draw a demarcation line between compensable regulatory expropriation and a non-compensable exercise of the State’s police and regulatory powers.31
A. INTERPRETATIVE ROLE OF GPLS
In international investment law, it is usually investment treaties that serve as the primary source of the rights and obligations for foreign investors and the States parties to the IIAs. Indeed, the ever-growing network of more than three thousand IIAs covers virtually every jurisdiction. In addition, under many IIAs, the jurisdiction of investment tribunals is limited to adjudicating
28 Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 0.10.
29 Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020); As Hirsh points out, GPL “are largely neglected by contemporary arbitral tribunals”
Hirsch, “Sources of International Investment Law”, in Bjorklund and Reinisch (eds.) International Investment Law and Soft Law (Elgar 2012) 26; Kotuby and Sobota, General Principles of Law and International Due Process: Principles and Norms Applicable in Transnational Disputes (Oxford University Press 2017).
30 Infra Part III.
31 Infra Part IV.
possible violations of the IIA itself. 32 In such cases, investment treaty tribunals are not empowered to rule separately on a violation of a norm of customary international law or a GPL. Therefore, it is not surprising that investment tribunals rarely refer to GPLs, at least as an autonomous source of international legal obligations.
That being so, apart from a normative role, GPLs also have a major interpretative function, which as one author puts, consists of providing “guidance for the interpretation and application of vague or uncertain treaty terms”.33 This is especially so in the field of international investment law, given that domestic legal principles of constitutional and administrative law are essentially ancestors of the standards of protection contained in the IIAs. According to Schill, the substantive standards of protection in the IIAs can “be viewed in parallel to functionally equivalent public law concepts that appear, often as constitutional standards, in domestic legal orders.”34
Indeed, GPLs can serve a useful role in international investment law as a major interpretative mechanism in the toolkit of an investment treaty tribunal. This does not, however, apply only to uncertain or vague treaty terms, but to any provision of IIA in relation to which there exists a relevant GPL. Indeed, the role of GPLs as a source of interpretation of the terms of IIAs is based on the rule of systemic integration in treaty interpretation as set out in Article 31(3)(c) of the VCLT. The provision governs the identification of the relevant context in which treaty terms ought to be interpreted, and reads as follows :
There shall be taken into account, together with the context: […]
32 The ECT, Art 26(1); The US Model BIT (2012) art 24(a) confines the jurisdiction to finding a breach of Arts 3-10 of the treaty and awarding damages; Article 1116(1) of the North American Free Trade Agreement (the “NAFTA”) (1994) limits jurisdiction to establishing breaches of certain provisions of the treaty and awarding damages therefor; Similarly, Article 9(3) the Netherlands-Venezuela BIT vests the tribunal with the power to render an award “limited to determining whether there is a breach by the Contracting Party concerned of its obligations under this Agreement, whether such breach of obligations has caused damages to the national concerned, and if such is the case, the amount of compensation.”
33 Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 1.33.
34 Schill, “General Principles of International Law and International Investment Law” in Gazzini and Brabandere (eds.) International Investment Law: Sources of Rights and Obligations (Brill 2012) 180.
(c) any relevant rules of international law applicable in the relations between the parties.35
The language “relevant rules of international law” is commonly understood to refer to the sources of international law as set out in Article 38(1) of the ICJ Statute, which includes other relevant treaties between the contracting States, as well as customary international law and GPLs.36 Importantly, the rule of systemic integration is one of the primary, as opposed to supplementary means of treaty interpretation. Article 31(3)(c) is clear that the relevant norms of international law
“shall be taken into account, together with the context” of the treaty term that is being interpreted.
The interpretative role of GPL should not therefore be limited to clarifying vague or uncertain treaty terms, which is the function of secondary sources of treaty interpretation. If there exists a GPL that satisfies the requirement of relevance under Article 31(3)(c) of the VCLT, the interpreter
“shall” consider it as part of the context of that term. As it is demonstrated below, the prohibition of uncompensated expropriation is precisely one of such relevant GPLs that must be taken into account as part of the context when interpreting the expropriation provisions of the IIAs, and more specifically when determining the scope and exceptions from the primary obligation of compensation for expropriation.
While scholars increasingly vouch for using the rule of systemic integration for interpreting the generic terms of the IIAs, investment treaty tribunals have rarely resorted to this methodology, at least in an express manner. One of the few instances is seen in El Paso v. Argentina, in which the tribunal constituted under the auspices of the International Center for Settlement of Investment Disputes (“ICSID”) referred to the rule of systemic integration, while applying the general principle of contributory fault in addressing Argentina’s defence based on necessity as a circumstance precluding wrongfulness.37 A more recent example can be found in Magyar Farming v. Hungary, where the ICSID tribunal resorted to the general principles of legal certainty and res inter alios acta, with the following explanation:
35 Article 31(3) of the VCLT (1969).
36 McLachlan, “Investment Treaties and General International Law”, ICLQ 57.2 (2008) 66; Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 2.35-39.
37 El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Award, 31 October 2011, paras. 617-23.
Pursuant to Article 31(3)(c) of the VCLT, treaties are to be interpreted in light of other rules of international law applicable between the parties. Pursuant to Article 38(1) of the ICJ Statute, this includes general principles of law.38
In the context of the investment treaty law, it is submitted that such secondary interpretative role is more suitable for GPLs, given that the IIAs themselves perform the role of the primary source of the rights and obligations of investors and States. As some authors point out, “in a mature normative regime like investment arbitration, [GPLs] stand to operate in the background, affect law-making, and apply autonomously only on occasion.”39
This does not mean, however, that the role of GPL should be underestimated. To the contrary, it is submitted that principles developed in the context of domestic legal systems can be rather helpful and relevant for the interpretation of the substantive standards of treatment contained in IIAs; even more than customary and conventional international law. This is so because investment protection standards regulate the use of the State’s coercive powers against private persons, a topic that has been traditionally subject to and primarily developed in the context of domestic administrative and constitutional laws. Indeed, standards of protection, such as prohibition of uncompensated expropriation has not found its way into international law and more specifically into the IIAs from the vacuum. Rather, as it will be detailed below, it emerged precisely as a general principle in municipal legal systems and only then was transposed to conventional and arguably to customary international law.40
Indeed, the principles pertaining to the notion of the rule of law, such as non-arbitrariness, substantive and procedural due process, prohibition of denial of justice, non-retroactivity and legal
38 Magyar Farming Company Ltd, Kintyre Kft and Inicia Zrt v. Hungary, ICSID Case No. ARB/17/27, Award of the Tribunal, 13 November 2019, para. 222; fn 167.
39 Gattini, Tanzi, Fontanelli, “Under the Hood of Investment Arbitration: General Principles of Law”, in Gattini, Tanzi, Fontanelli, General Principles of Law and International Investment Arbitration (Brill 2018) 20.
40 Some consider that the requirement of compensation for expropriation has become so well established that it forms part of the customary international law (See, Texaco Overseas Petroleum Co v. Libyan Arab Republic, 1979, International Law Reporter 387.); Others disagree: Ripinsky and Williams, Damages in International Investment Law (2008) 83.
certainty trace their roots first and foremost to domestic constitutional and administrative laws.41 Thus, whenever an IIA requires a fair and equitable treatment of investors and investments, it would not be prudent for an investment tribunal to ignore a wealth of thought and materials underpinning such general principles, and to limit itself to applying the arbitrators’ subjective notion of fairness, or as it sometimes happens, simply restate the past decisions of other investment tribunals.
What is more, if a proper methodology is adopted for identifying the content and scope of the relevant GPLs, their use can contribute to increased legal certainty and predictability in investment arbitration. As the International Law Association study on the use of domestic law principles in the development of international law highlights, a comprehensive use of the pertinent GPLs by international tribunals could “facilitate a more uniform, predictable and reviewable recourse to the general principles of law, reducing the high degree of subjectivity and potential misuse”.42 Indeed, if the content of the standards of treatment in international investment law were solidified by thoroughly identified GPLs, this could alleviate the backlash that has been looming against the investor-State dispute settlement system. According to Schill, GPL should “play an important role in the current process of recalibrating international investment law in reaction to what is called either a backlash in international investment law or investment law’s legitimacy crisis”.43 He is right.
Thus a general principle prohibiting uncompensated expropriation, if such were to be identified, would be highly relevant to understanding both normative and historical context in which the expropriation provisions of the IIAs occur. As seen below, the ethical underpinnings and the content of this principle as it evolved in different municipal legal systems offer a helpful guidance in resolving various pressing questions of practical importance that investment treaty tribunals grapple with in relation to the expropriation standard.
41 See, Rule of Law Checklist, adopted by the Venice Commission at its 106th Plenary Session, CDL- AD(2016)007-e (Venice, 11-12 March 2016).
42 Use of Domestic Law Principles in the Development of International Law (ILA Draft Report 2018) para.
6.
43 Schill, “General Principles of International Law and International Investment Law” in Gazzini and Brabandere (eds.) International Investment Law: Sources of Rights and Obligations (Brill 2012) 136.
B. PROHIBITION OF UNCOMPENSATED EXPROPRIATION AS A GPL
The proper methodology for identifying the content and scope of a GPL has been subject to an extensive scholarship. The ILC has recently convened a special rapporteur to “provide authoritative clarification of the nature, scope and function of general principles of law, as well as of the criteria and methods for their identification.”44 While, for the time being, we do not have the benefit of the ILC’s report on this subject, a comprehensive set of rules can be derived from the available scholarly works and decisions of international adjudicatory bodies. As well summarized in Dumberry’s recent treatise on GPLs, there is a three-step process allowing the identification of GPLs and their transposition on international plane. The steps are as follows:
First Step: The Identification of a Principle That is Common to Domestic Legal Orders;
Second Step: The Distillation of the Essence of the Principle;
Third Step: The Adaptation and Transposition of the Principle into International Legal Order.45
In the following subsections, I go through each of these steps to first establish the existence and then determine and distill the scope of the general principle of prohibition of uncompensated expropriation.
Identification of the principle common to domestic legal orders
The first step is to identify a principle that is common to different domestic legal orders. There is a general consensus among public international law scholars that, in order to identify a GPL, one should first look at “positive legislations of States.”46 According to Akehurst, supplementary sources, such as scholarly writings can also be helpful, however:
44 Vázquez-Bermúdez, First Report on General Principles of Law by Special Rapporteur, International Law Commission Seventy-first Session (Geneva, 29 April – 7 June and 8 July – 9 August 2019) 3.
45 Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) Part 3.
46 Vitanyi, “Les positions doctrinales concernant le sens de la notion the principes generaux de droit reconus par les nations civiliSees”, 86 RGDIP (1982) 96; Dumberry, A Guide to General Principles of Law in
There is only one reliable way in which a general principle of law may be proved, and that is by examining the laws of different states.47
Similarly, for Mann “there does not exist any system or branch of law, other than comparative law, which could develop general principles.”48
An obvious question that arises is how wide-ranging a comparative analysis should be. It appears generally accepted that not all laws need or should be examined.49 Instead, “one should focus on the most representative legal systems.”50 The test is “whether a critical mass of legal systems agrees on the existence of a particular principle”.51 To select representative legislations, one should avoid applying arbitrary criteria, such as the author’s or the adjudicator’s familiarity with a specific jurisdiction, and instead attempt to find at least one representative from all the major families of legal systems, and also “look at the geographic distribution within each family of law”.52
In addition, unlike in case of customary international law, for the identification of a GPL, the review of actual State practice is not required. Instead, the focus should be on the positive legislation since “the inclusion of a principle in the written laws of many legal systems is itself a
International Investment Arbitration (Oxford University Press 2020) 3.10; Kotuby and Sobota, General Principles of Law and International Due Process: Principles and Norms Applicable in Transnational Disputes (Oxford University Press 2017) 23.
47 Akehurst, “Equity and General Principles of Law”, 25 ICQL (1976) 818.
48 Mann, “Reflexions on a Commercial Law of Nations”, 33 British YIL (1957) 36;
49 Vadi, Analogies in International Investment Law and Arbitration (Cambridge University Press 2015) 223; Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 3.09.
50 Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 3.29.
51 Nolan and Sourgens, “Issues of Proof of General Principles of Law in International Arbitration”, World Arbitration and Mediation Review 3.4-5 (2009) 511.
52 Use of Domestic Law Principles in the Development of International Law (ILA Draft Report 2018) para.
51; Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 3.32.
validation of the principle.”53 Thus, the fact that a particular norm or a principle may not be applied in practice is not an obstacle for the formation of a GPL.54 Similarly, the identification of a GPL does not require the existence of opinio juris, i.e. the evidence of the States’ conviction that the principle in question applies as an internationally binding norm.55
The roots of the proposed principle we are about to analyze is often traced back to the post- Enlightenment legal thought.56 Indeed, the protection of private property against uncompensated public encroachment underlies the constitutional foundation of many contemporary jurisdictions.
For instance, the US Declaration of Independence and its antecedent Virginia Declaration of Rights announced that all men are endowed with certain fundamental rights that precede the creation of the Government. Namely, property together with life, liberty and pursuit of happiness was proclaimed as a purpose of an organized society: 57
[A]ll men are by nature equally free and independent, and have certain inherent rights, of which, when they enter into a state of society, they cannot, by any compact, deprive or divest their posterity; namely, the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing and obtaining happiness and safety.58
Similarly, the Declaration of the Rights of Man and of the Citizens adopted in the aftermath of the French Revolution declared four natural rights “liberty, property, security, and resistance to
53 Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 3.61.
54 Kotuby and Sobota, General Principles of Law and International Due Process: Principles and Norms Applicable in Transnational Disputes (Oxford University Press 2017) 43; Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 3.61.
55 Dumberry, A Guide to General Principles of Law in International Investment Arbitration (Oxford University Press 2020) 1.33 et seq.
56 The theoretical foundations of the principle will be discussed in more detail in infra Part 0.
57 Farrand (Ed.), The Records of the Federal Convention of 1787 (Yale University Press 1911) 533.
58 George Mason, Declaration of Rights, 1776, Accession 51818, Personal Papers Collection, Library of Virginia, Richmond, Virginia, para. 1.
oppression” as objects of an organized political society.59 Article 17 of the declaration laid out the limits to the State’s power to intervene with the right to property:
Since property is an inviolable and sacred right, no one shall be deprived thereof except where public necessity, legally determined, shall clearly demand it, and then only on condition that the owner shall have been previously and equitably indemnified.60
That being so, a veritable comparative analysis should not be limited or even primarily based on the so-called “Western” legal thought; especially so, in the context of international investment law where the network of IIAs is truly global and there is a strong sentiment of opposition against any form of neocolonialism.
While the civil and common law systems represent 80 per cent of the world’s legislations, it is generally accepted that a true comparative analysis should attempt to cover the following sub- families of legal systems: Common law, Romanistic or Napoleonic civil law, Germanic civil law, Far Eastern law, Islamic law and Nordic law.61
Below I analyze representatives from each of these sub-families while observing the geographic distribution of the selected legislations, so as to capture each of the five UN regional groups:
Africa, Asia and the Pacific, Eastern Europe, Latin America and the Caribbean, Western Europe and Others.62 The inquiry will focus on determining whether, as a matter of a general principle, all these legal systems recognize the State’s primary obligation to provide compensation for deprivation of property. At this stage, the inquiry will be limited to identifying the general common contours of the principle of compensation. More specific features, such as the types of interests
59 Declaration of the Rights of Man and of the Citizens, Approved by the National Assembly of France (26 August 1789) Article 2; See also, for the right to property and its role in the constitution of Argentina, García Mansilla, Ramírez Calvo, Las fuentes de la Constitución Nacional (Lexis Nexis 2006) 25, 27, 36, 37, 227-231, 250.
60 Declaration of the Rights of Man and of the Citizens, Approved by the National Assembly of France (26 August 1789) Article 17.
61 Kotuby and Sobota, General Principles of Law and International Due Process: Principles and Norms Applicable in Transnational Disputes (Oxford University Press 2017) 23.
62 UN Regional Groups: https://www.un.org/depts/DGACM/RegionalGroups.shtml (last accessed on 28 June 2020).
capable of being expropriated, and exceptions from the duty of compensation, will be addressed in the subsequent subsection, which deals with the distillation of the essence of the principle.
i. Common law
Being one of the most influential legal systems, common law covers jurisdictions of differing social and cultural backgrounds. I will summarize the regulation of uncompensated expropriation in the US, South Africa and England & Wales. I selected these jurisdictions to observe an equitable geographic distribution. In addition, South Africa is not a purely common law jurisdiction as it has also been influenced by Dutch and German laws. Therefore, exploring the South African approach to compensation for expropriation can itself be considered as cross-cultural and therefore especially instructive.
Common law jurisdictions almost invariably prohibit uncompensated deprivation of property. In some common law jurisdictions, such as the US, the rule is enshrined in the constitution and developed by judicial practice. In others, the rule applies as an uncodified common law constitutional principle.63
The Fifth Amendment to the Constitution of the United States famously provides that “private property [shall not] be taken for public use, without just compensation.” 64 While there is a debate among scholars as to what constitutes “private property” for the purposes of the Fifth Amendment, it is now well established that the constitutional notion of property is autonomous from the notion found in private law.65 In addition, the US Supreme Court has long recognized that the provision applies not only to direct takings of title and physical seizure of assets but also to indirect and regulatory takings of property interests, e.g. instances when proprietary title remains intact but the asset in question is substantially devoid of economically viable use.66
63 Blackstone, Commentaries on the Laws of England (Butterworth and Sons, 16th ed., 1825) Book 1, 135.
64 Fifth Amendment to the United States Constitution (1789).
65 Merrill, “The Landscape of Constitutional Property”, 86 Virginia Law Review 885 (2000); More details on this subject in Infra Part III.
66 Lucas v. South Carolina Coastal Council, US Supreme Court, 505 U.S. 1003, 1992; Pennsylvania Coal Co. v. Mahon, US Supreme Court, 260 U.S. 393, 1922; Penn Central Transportation Co. v. New York City,
It is true that the Fifth Amendment case law of the US Supreme Court initially focused on cases of “condemnation”, i.e., proceedings of direct expropriation of private property in which the affected individual appears as a defendant. From 1870s however, the US Supreme Court allowed so-called “inverse condemnation” actions, whereby a private person could claim compensation from the Government under the Fifth Amendment for measures that have an effect of a taking but have not been formally declared so. And, as from the landmark decision in Pennsylvania Coal in 1922, the Supreme Court introduced the concept of regulatory takings, i.e., the regulatory measures that do not overtly take the title to an asset but restrict its use and enjoyment to the extent of rendering the title economically worthless. The Supreme Court thus considers even fully legitimate regulations to entail the duty of compensation when they result in deprivation of property. In the Court’s words, “a strong public desire to improve the public condition is not enough to warrant achieving the desire by a shorter cut [without] paying for the change.”67
More precisely, the US Supreme Court has recognized four distinct scenarios of regulatory takings.68 Although in certain instances the Court considers the appellants’ economic interests as a relevant circumstance, in all of the four scenarios measures should affect the appellants’ property rights in order to constitute a taking.
The first scenario relates to so-called “physical” indirect taking. In Loretto v. Teleprompter Manhattan, at issue was the State of New York’s measure obliging landlords to allow the installation of cables by a cable TV company (CATV) in exchange of payment of 1 dollar. The Court found that the measure amounted to a taking since it required the owners to suffer a quasi- permanent physical invasion of their property. The one-dollar compensation was clearly inadequate and therefore the measure was found unconstitutional.69 In this scenario, the measure
US Supreme Court, 438 U.S. 104, 1978; Loretto v. Teleprompter Manhattan CATV Corp., US Supreme Court, 458 U.S. 419, 1982.
67 Pennsylvania Coal Co. v. Mahon, US Supreme Court, 260 U.S. 393, 1922.
68 Pennsylvania Coal Co. v. Mahon, US Supreme Court, 260 U.S. 393, 1922; Lingle v. Chevron USA, Inc., US Supreme Court, 544 U.S. 528, 2005.
69 Loretto v. Teleprompter Manhattan CATV Corp., US Supreme Court, 458 U.S. 419, 1982; See also, Kaiser Aetna v. United States, US Supreme Court, 444 US 164, 1979.
interfered with the owner’s right to exclude others from the use of his asset, which the Court considers as a fundamental attribute of property.
The second line of case law focuses on regulatory limitations of the permissible use of an asset. In Lucas v. South Carolina, the Supreme Court was faced with a takings claim from an individual who bought two residential lots on a South Carolina barrier island, intending to build single-family homes. Subsequently, the South Carolina legislature enacted the Beachfront Management Act, which barred Lucas from erecting any permanent habitable structures on his parcels.70 The Court held that when Governmental measures “completely deprive” the owner of “all economically beneficial use” of his property, the Government must in principle pay just compensation. The Court is clear that the impugned measures should deprive the owner of the “all economically beneficial use” as opposed to subjective or intended use.
The third scenario relates to the measures depriving the title-holder of the intended use of the asset to which he had a reasonable expectation. In Penn Central v. New York City,71 the State of New York designated the Pennsylvania Station as a landmark under a newly enacted Landmarks Preservation Law. As a result, the owner of the building, Penn Central Co. could no longer carry out the intended project to construct a multistory office building over the station terminal. Unlike in Lucas v. South Carolina, here the asset has not been objectively deprived of “all economically beneficial use.” Instead, the owner could no longer use the asset for the investment project he intended to carry out. The Supreme Court held that the measure did not amount to a taking. In doing so, the Court found that the owners could still use their property in multiple other economically viable ways. It added, however, as an obiter dictum, that when the Government goes
“too far” in regulating the use of property so that it interferes with the owner’s “distinct investment- backed expectations” it may well have to provide compensation. This dictum has received severe criticism from the constitutional law scholars, and the Court seems not to have followed it in practice.72
70 Lucas v. South Carolina Coastal Council, US Supreme Court, 505 U.S. 1003, 1992.
71 Penn Central Transportation Co. v. New York City, US Supreme Court, 438 U.S. 104, 1978.
72 See, Echeverria, “Making Sense of Penn Central”, UCLA Journal of Environmental Law and Policy 23.2 (2005); Barros, “The Police Power and the Takings Clause”, University of Miami Law Review 58, 471 (2004).
The fourth scenario arises out of a narrow category of measures, commonly known as the land use exaction scheme. In Nollan v. California Coastal Commission and Dolan v. City of Tigard, the US Supreme Court had to assess whether a scheme requiring private land-owners to provide a partial public access to their land in exchange of a discretionary development permit amounted to a taking.
The Court found that the requirement to allow the public access to the land constituted a taking, which generated the constitutional right to compensation. According to the Court, the discretionary benefit of land development afforded in exchange of the interference was not an adequate measure of compensation and the scheme therefore infringed the Fifth Amendment of the Constitution. In this scenario too, the measure in question interfered with the fundamental property right as it deprived the owners of their right to exclude others from the use of their assets.
In addition, the US Supreme Court and the constitutional scholars recognize that property rights are encumbered by inherent limitations derived from the rights and interests of the others. Thus, a proper enforcement of such existing limitations is not seen as a compensable taking. The US Supreme Court addressed this issue in Lucas v. South Carolina. As described above, Lucas was barred from erecting habitable buildings on his land parcels that were located in a beachfront zone.
The reason was that the planning authorities found that the construction in that area would risk the erosion of the coastline and damage to the existing neighboring buildings.73 The Supreme Court held that the denial of construction, although depriving the land of “all economically viable use”, which would normally constitute a taking, was not compensable, since Lucas never had a right to construct on that land under the existing principles of nuisance and property law:
The use of these properties for what are now expressly prohibited purposes was always unlawful, and (subject to other constitutional limitations) it was open to the State at any point to make the implication of those background principles of nuisance and property law explicit.74
The Court warned, however, that when the Government deprives an owner of all economically viable use of the asset, it “may resist compensation only if the logically antecedent inquiry into the nature of the owner's estate shows that the proscribed use interests were not part of his title to begin with.”75
73 Lucas v. South Carolina Coastal Council, US Supreme Court, 505 U.S. 1003, 1992.
74 Ibid., at 7.
75 Ibid.
