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Expropriation in Investment Treaty Arbitration by Cox, Johanne M (9th May 2019)

Part III Remedies, 12 The Standard of Compensation

From: Expropriation in Investment Treaty Arbitration

Johanne M. Cox

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 16 September 2019

Subject(s):
Expropriation — Investor — Standards of treatment — Customary international law — Compensation — Damages

(p. 294) 12  The Standard of Compensation

A.  Overview

12.01  In investment treaty arbitration a number of factors are important in determining the compensation for expropriation of an investment:

  1. (a)  The standard of compensation—for lawful expropriation the treaty standard applies (which, in most investment treaties, is the fair market value immediately before the expropriation or before the decision to expropriate the asset became publicly known). For unlawful expropriation, it is open to the investor to argue that the customary international law standard of ‘full reparation’ derived from the Chorzów Factory case and codified in Article 31(1) of the International Law Commission’s Articles on State Responsibility (the ILC Articles) applies. However, not all investment treaty tribunals have accepted this distinction and some have considered that the treaty standard of compensation applies in cases of both lawful and unlawful expropriation.

  2. (b)  The valuation date—in cases of lawful expropriation, the treaty will normally put the date of expropriation immediately before the expropriation took place (to exclude any decrease in the assets’ value as a result of the expropriation) whereas, in the case of unlawful expropriation the investor is entitled to choose a valuation date as of the date of the award if the investment increased (or would have increased) in value since the date of taking. The tribunal will make the final determination on the issue. Where there are different treaty breaches, investment treaty tribunals will consider the most appropriate date of valuation in light of the various breaches. This is considered in Chapter 10, Section E (Expropriation and Other Treaty Standards).

  3. (c)  The method of valuation—there are many different methods of valuation, broadly divided between the forward-looking approach (income-based models and the discounted cash flow (DCF)) and the backward-looking approach (cost- and asset-based models). The most appropriate method(s) of valuation will depend on the type of asset which has been expropriated and other relevant circumstances. In income-based (p. 295) models, the discount rate will be an important factor. The method of valuation in investment treaty arbitration is considered in Chapter 13 (Methods of Valuation).

  4. (d)  The interest rate—the sum of interest awarded can be considerable and sometimes significantly more than the principal claimed, especially where many years have passed since the expropriation. The award of interest is considered in Chapter 14 (Interest).

B.  The Treaty Standard of Compensation

12.02  Most investment treaties provide for the ‘payment of prompt, adequate, and effective compensation’ for lawful expropriation. This is known as the HULL formula. It is generally understood as the requirement to pay ‘full compensation’ for expropriation, whereby ‘adequate’ compensation is understood to mean that ‘the investor is paid the full value of the property taken’.1

12.03  The HULL formula dates back to the 1930s and was first articulated by the United States’ Secretary of State, Cordell Hull, in response to Mexico’s nationalization of American petroleum companies in 1936.2 The governments of the United States and Mexico also entered into diplomatic exchanges concerning the taking, which began in 1915, by the Mexican government of agrarian properties owned by American nationals without compensation. On 21 July 1938, Cordial Hull sent a letter to the Secretary of State to the Mexican Ambassador, Castillo Najera, protesting against the taking of property ‘without adequate, effective and prompt compensation’ and identifying the issue as ‘not whether Mexico should pursue social and economic policies designed to improve the standard of living of its people. The issue is whether, in pursing them, the property of American nationals may be taken by the Mexican government without making prompt payment of just compensation to the owner in accordance with the universally recognized rules of law and equity’. Hull asserted that the right of compensation was ‘unquestioned under international law’ and that ‘the taking of property without compensation is not expropriation. It is confiscation’.3 The Mexican government rejected that there existed in international law any principle universally accepted by countries which would render obligatory the giving of adequate compensation for expropriations ‘general and impersonal’ in question.4

(p. 296) 12.04  The HULL formula was, for many years, controversial. As the tribunal in CME Czech Republic v. Czech Republic5 explain, capital exporting countries viewed it as an expression of customary international law, whereas developing countries and the communist States maintained that the foreign investor was entitled to no more compensation than provided by the law of the host government however and whenever amended and applied. The controversy came to a head with the adoption by the General Assembly of the United Nations of the Charter and Economic Rights and Duties of States which was voted against by the major capital exporting States. The tribunal observed that, thereafter, the controversy was put aside by the international community with the conclusion of more than 2,200 bilateral (and a few multilateral) investment treaties which include variants on an agreed, essential theme, namely that when a State takes foreign property, full compensation must be paid.6 This background is more fully set out in Chapter 1 (Introduction).

12.05  The World Bank Group’s, Report on the Legal Framework for the Treatment of Foreign Investment7 (the Guidelines) explains that, in line with many awards, as well as a significant numbers of bilateral investment treaties (BITs) and multilateral instruments and some national codes, the level of compensation for a taking will be deemed to be ‘adequate’ if it is based on the ‘fair market value’ of the asset immediately before the taking occurred or the State’s decision became publicly known.8

12.06  The Guidelines further explain that compensation will be deemed ‘effective’ if paid in the currency brought in by the investor where it remains convertible, in another currency designated as freely usable by the International Monetary Fund, or in any other currency accepted by the investor.9 Compensation will be deemed ‘prompt’ in normal circumstances if paid without delay. In cases where the State faces exceptional circumstances, compensation may be paid in instalments within a period which will be as short as possible, and which will not in any case exceed five years from the time of taking, provided that reasonable, market-related interest applies to the deferred payments in the currency.10

12.07  The vast majority of BITs adopt the HULL formula. The measure of compensation is ordinarily stated to be the ‘fair market value’ immediately prior to the taking.11 Some multilateral and regional investment agreements also refer to the HULL formula. The Energy Charter Treaty (ECT) provides that expropriations or measures having equivalent effect must be accompanied by the ‘payment of prompt, adequate, and effective compensation’. The measure of compensation is stated as being the ‘fair market value’ of the investment ‘at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the Investment’.12 The ASEAN (p. 297) Comprehensive Investment Agreement also provides that compensation shall be on ‘payment of prompt, adequate, and effective compensation’ meaning without delay, equivalent to the ‘fair market value’ of the expropriated investment immediately before or when the expropriation occurred, ‘fully realisable and freely transferable.’13 The Central American Free Trade Agreement (CAFTA) contains a similar provision.14 The North America Free Trade Agreement (NAFTA) also refers to the ‘fair market value’ of the expropriated investment immediately before the expropriation took place and provides that compensation shall be paid without delay and be fully realizable.15

12.08  However, not all investment agreements follow suit. For example, the Agreement on Promotion, Protection, and Guarantee of Investments among Member States of the Organisation of the Islamic Conference provides that ‘compensation shall be equivalent to the damage suffered by the investor depending on the type of damage and its quantum’.16 Some BITs do not refer to the HULL formula and instead adopt standards such as the ‘just value’,17 the ‘genuine value’,18 or, as in the case of many German BITs, ‘the value of the expropriated investment’. A question that follows is whether there is a practical significance between the HULL formula or the ‘fair market value’ and other standards? The answer (p. 298) depends on whether the treaty includes further direction as to the value of the compensation (e.g. some BITs go on to state that this means the ‘fair market value’ of the investment), or, in the absence of this, the tribunal’s interpretation of the standard.

12.09  Schacter submits that tribunals have considerable latitude where terms such as ‘just’, ‘appropriate’, and ‘equitable’ are used without further clarification as to what is meant by them and that, in the case of a single property or investment, this would seem to require the payment of ‘full market value’ where this can be determined. Schacter further observes that cases of large-scale expropriation often raise questions as to the ability of the State to pay full compensation and, argues that, in such cases, a good case can be made that less than full value would be ‘just compensation’ when the State would otherwise have ‘an overwhelming financial burden’.19

12.10  The various attempts at codification of customary international law, now more than two decades old, recognize that compensation should be ‘just’ and equate this to the ‘fair market’, ‘genuine value’ or ‘value’ of the property taken:

The 1961 Harvard Draft Convention, Article 10:

  1. 2.  The taking, under the authority of the State, of any property of an alien, or of the use thereof, for a public purpose clearly recognised as such by a law of general application in effect at the time of the taking is wrongful if it is not accompanied by prompt payment of compensation in accordance with the highest of the following standards:

    1. (a)  compensation which is no less favourable than that granted to nationals of such State; or

    2. (b)  just compensation in terms of the fair market value of the property …

      or

    3. (c)  if no fair market value exists, just compensation in terms of the fair market value of such property or of the use thereof …

If a treaty requires a special standard of compensation, the compensation shall be paid in accordance with the treaty (emphasis added).

The 1967 OECD Draft Convention on the Protection of Foreign Property, Notes and Commentary to Article 3 reads:

iii.  The measures are accompanied by the payment of just compensation. Such compensation shall represent the genuine value of the property affected, shall be paid without undue delay, and shall be transferable to the extent necessary to make it effective for the national entitled thereto (emphasis added).

The 1987 Restatement of the Law (Third) of Foreign Relations of the United States, Section 712, recognizes there are authoritive declarations that under international law the compensation paid must be ‘appropriate’, but nevertheless states that compensation for expropriation must be ‘just’ meaning, in the absence of exceptional circumstances, an amount equal to the value of the property taken:

For compensation to be just under this Subsection, it must, in the absence of exceptional circumstances, be an amount equivalent to the value of the property taken and be paid at the time (p. 299) of taking, or within a reasonable time thereafter with interest from the date of the taking, and in a form economically useable by the foreign national (emphasis added).

12.11  Since these efforts at codification, thousands more BITs have come into existence. The 1990s saw a rapid increase in the number of BITs. The number of treaties quintupled during the decade, rising from 385 at the end of the 1980s to 1,857 at the end of the 1990s. The number of countries involved in BITs at this time reached 173.20 Today, the number of BITs stands at over 3,000. Schwebel argues that BITs now represent customary international law.21 Given that the vast majority of BITs reference the HULL formula, this re-opens the question as to whether the HULL formula represents customary international law for lawful expropriation today.

12.12  Coe and Rubins submit that the HULL formula appears to represent the customary international law standard.22 Others have taken a different view. Dolzer considers that the current law on the standard of compensation remains undecided. Dolzer submits that the general yardstick for lawful expropriation continues to be ‘appropriate compensation’ and that the question remains as to whether this, in all circumstances, coincides with the HULL formula. Dolzer concludes that reference to the HULL formula in modern investment treaties cannot, when a variety of compensation arrangements falling below the HULL formula are accepted in practice, demonstrate the continuing validity of the traditional law position:

Against this background, the repeated assertion of the legal conviction that the traditional law stands unmodified in principle appears as artificial and illusory as the point of view that international law no longer protects alien property. Reference to standards of protection incorporated in modern investment treaties cannot, under these circumstances, demonstrate the continuing validity of the traditional law. Treaty arrangements may be considered as reflecting customary law only insomuch as it can be assumed that the parties intended to express that state of the law which would also be valid in the absence of the treaty. Still, in light of the heterogeneity of State practice, further attempts to reach a more systematic view of the current law are needed.23

12.13  Reinisch argues ‘today, however, the traditional consensus found in the HULL formula is no longer generally accepted as an expression of customary international law’, pointing to the communist expropriations in Eastern Europe and the large-scale nationalizations in many developing countries throughout the twentieth century coupled with the attempts to establish a New International Economic Order through a series of United Nations’ General Assembly Resolutions. Reinisch observes that ‘the opinion seems to prevail that there is still a customary international law requirement to make at least some compensation in case of (p. 300) expropriation’.24 This view is shared by both Schachter25 and Brownlie, ‘there can be no doubt that the Cordell Hull formula no longer reflects the generally accepted international standard’.26 Sornarajah submits that there is no treaty law supporting a norm of full compensation, instead expediency and the need to attract foreign investment rather than a clear conviction seem to have been the reason for stating the rule on full compensation rather than any conviction that it represents a rule of law.27 McLachlan, Shore, and Weiniger consider that, given the difference between different standards, it is not possible to speak of consensus in international law on the standard of compensation but point out that the vast majority of BITs and multilateral treaties follow the HULL formula and, given the uniformity of treaty provisions, in almost all treaty disputes the problem of identifying a standard of compensation does not arise as a practical issue.28

12.14  Ripinsky and Williams also consider that customary international law is not fully settled on the issue of compensation for lawful expropriation and submit that ‘it would perhaps be reasonable to conclude, in light of all the relevant sources considered, that at this time, customary international law requires compensation equivalent to the fair market value of the investment taken unless—in light of specific circumstances of the case—such compensation would lead to a manifestly inequitable result destroying the balance of public and private interests.’ They observe that, undoubtedly, over time, there has been some movement from the more flexible standard of ‘appropriate’ compensation, which implied the possibility of partial compensation that would take into account equitable considerations, to a more rigid standard of ‘adequate’ or ‘full’ compensation assessed on the basis of the fair market value of the expropriated investment.29

12.15  Whilst the debate rumbles on, what is clear is that investment treaty tribunals apply the treaty standard of compensation in cases of lawful expropriation and that the standard of compensation in the majority of BITs is the HULL formula with ‘adequate’ normally defined as the ‘fair market value’ of the investment. If it is accepted that BITs now represent customary international law, it follows that the HULL formula represents the standard of compensation for lawful expropriation in customary international law. If not, then the debate continues.

(p. 301) C.  The Standard of Compensation for Unlawful Expropriation

12.16  There is disagreement as to which standard of compensation should apply in cases of unlawful expropriation: the treaty standard (normally the ‘fair market value’ of the investment immediately before the taking), or the general rules of State responsibility under customary international law, i.e. the standard of full reparation derived from the Chorzów Factory case (restitution or ‘payment of a sum corresponding to the value which a restitution in kind would bear’) as codified in ILC Article 31(1). The customary international law standard of compensation is considered in Chapter 11 (Remedies in Customary International Law).

12.17  Arbitral practice is split on this issue, although the modern trend appears to be for investment treaty tribunals to apply the distinction. In cases where the value of the investment would have decreased after the expropriation, the application of the restitution standard by various tribunals has led to use of the date of the expropriation as the date for the valuation of damages30 so the result is therefore one and the same as applying the treaty standard. In other cases, the value of the investment could have risen significantly after the date of the expropriation, and, consequently, application of the customary international law standard may have a significant impact on damages.

12.18  Dolzer and Schreuer submit that the better view is that an illegal expropriation will fall under the general rules of State responsibility.31 Similarly, Ripinsky and Williams submit, relying on the dictum of the Permanent Court of International Justice (PCIJ) in the Chorzów Factory case, that it is the customary international law standard of compensation, not the treaty standard, which applies in cases of unlawful expropriation:

An award of compensation for unlawful expropriation is governed by customary international law, which equates unlawful expropriation to other wrongful acts of States, and accordingly sees compensation as a means to ‘wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed’. However, due to the high standard of compensation set in most treaties, which require payment of fair market value of the investment taken, it is unsurprising that treaty-based compensation will often provide the same result as compensation assessed on the basis of customary international law. Nonetheless, differences between the two regimes do exist and they may, depending on the facts of the case, have considerable impact on the amount awarded. Under the customary international law regime, a claimant, whose investment has been unlawfully expropriated, may recover (1) the higher value that the investment may have acquired at the date of award and (2) incidental expenses. Illegality of expropriation may also influence discretionary choices made by arbitrators in the assessment of compensation.32

(p. 302) 12.19  Also relying on Chorzów Factory, Marboe concludes that, as a matter of principle, a differentiation between the amount of compensation payable for lawful and unlawful compensation is necessary because otherwise the financial consequences of lawful and unlawful behaviour would be the same and this would not be in the interest of legal justice and would run counter to the general preventative function of law.33 Marboe adds that the relevance of the difference between lawful and unlawful expropriation for the determination of remedies and valuation has been confirmed in recent investment treaty arbitrations.34 Reinisch also submits that where compensation is not paid, or at least offered, and/or other legality requirements are not fulfilled, an expropriation becomes illegal and State responsibility is triggered. In his view, actual case law largely adheres to the distinction between the two forms of taking and the different consequences stemming from these different acts.35

12.20  Taking a different stance, Sheppard submits that, for the most part, the conduct requirements—that an expropriation which is carried out in the public interest, is not discriminatory, and is carried out under due process of law—would appear otiose under BITs, NAFTA, and the ECT. He argues that ‘the relevant compensation standard is the one provided in the ECT, and this applies whether all, some or none of the ‘conduct requirements’ are met. The exception to this is ‘where no compensation standard was prescribed, or the contracting States has evidenced a contrary intention’.36 This, Sheppard submits, is the overwhelming practice of international tribunals constituted under the Treaty of Amity, BITs, and NAFTA.37 Sheppard distinguishes claims under most investment treaties from the Chorzów Factory case for reason that the conduct requirements are different to the conditions for expropriation under the 1922 Geneva Convention applied by the PCIJ and that the PCIJ was not dealing with a paradigm case of expropriation under customary international law where a State has the right to expropriate an alien’s property and may do so legally if certain conditions are met; rather, Poland was not entitled (save in exceptional (p. 303) circumstances) to expropriate property of a German national and could not make the expropriation legal even it paid fair compensation.38

12.21  In support of the contention that the treaty standard of compensation applies to both lawful and unlawful expropriations, Sheppard argues that ‘it would seem unlikely that the ECT (or BIT) Contracting Parties, having negotiated and prescribed the standard of compensation to be paid where the host State expropriates a qualifying investment, intended to limit that standard only to situations in which the conduct requirements had all been met, and that the customary international law standard should apply in all other situations’.39 In 2007, McLachlan, Shore, and Weiniger pointed to the argument made by some that the applicable standard of compensation has been resolved in the ‘BIT generation’ in that tribunals no longer seem to consider whether a taking is lawful or unlawful. In their view, this was understandable—if a claimant can receive ‘full’ compensation without having to overcome the extra hurdle of demonstrating that the taking was unlawful in the first place then there will be no need for claimants to attempt this extra step.40 However, a decade later, they qualify that this conclusion can no longer be supported in light of many of the valuation decisions since rendered.41

D.  The Importance of the Date of Valuation

12.22  The valuation date has been described as ‘a factor that straddles the line between fact and law’.42 It can have a significant impact on the damages awarded. In the case of lawful expropriation, the date of valuation will be the date of expropriation set out in the investment treaty whereas, in the case of unlawful expropriation, it is open to the investor to argue that customary international law remedies apply and that the valuation date should be the date of the award. Tribunals decide the issue based on whether they accept the lawful/unlawful distinction for compensation and the circumstances of the case.

12.23  Tribunals have rejected the date of the award as a valuation date where there is uncertainty about the future profitability of the investment. In Teinver SA, Transportes de Cercanías SA and Autobuses Urbanos del Sur SA v. Argentina, the tribunal rejected the claimants’ argument that the date of valuation should be the date of the award given the airlines comprising the investment were in financial difficulty at the time of expropriation:

Claimants argued that in an unlawful expropriation scenario, they were entitled to the greater of the fair market value at the time of the taking and the fair market value at the date of the Award. While the Tribunal agrees that this may be an appropriate determination of reparation when a State expropriates an obviously profitable asset, it is not appropriate in these circumstances. The Airlines were in financial difficulty and the record indicated that significant cash investments were required to allow them to continue to operate. Even if it were appropriate to award Claimants a value that reflected a restructured and refinanced (p. 304) asset, the Tribunal is not persuaded that the Claimants have adequately proved a higher value for the shares of the Airlines than the USD 330 million, which reflects the minimum value calculated in the Credit Suisse valuation.43

The tribunal determined that, but for the unlawful expropriation, the claimants would have been paid fair market value for their investment in 2008. The tribunal awarded USD 320 million and, accepting that interest forms part of the obligation to make full reparation, interest compounded semi-annually from 2008 until payment in full.

12.24  In Ioannis Kardassopoulos v. Georgia, the tribunal rejected the claimant’s submission that the valuation date should be the date of the award for reason that the claimants would likely have sold their shares in GTI Ltd, a Georgian-incorporated joint venture company in which the claimants’ company, Tramex, and the Georgian State-owned national oil company, SakNavtobi, each owned a 50 per cent interest. The tribunal found that the respondent unlawfully expropriated the claimant’s rights by Decree No. 178 on 20 February 1996 yet considered ‘that the circumstances of the case required it to value Mr. Kardassopoulos’ investment as of the day before passage of Decree No. 477 [on 10 November 1995] precisely to ensure full reparation and to avoid any diminution of value attributable to the State’s conduct leading up to the expropriation.’ The tribunal opined that:

As may be seen from the cases above where a higher recovery has been permitted under the customary international law standard of compensation, there must be a factual basis on which to award such higher recovery. Any such recovery must, furthermore, measure the damage sustained and not impose punitive damages on the Respondent State. In certain circumstances full reparation for an unlawful expropriation will require damages to be awarded as of the date of the arbitral Award. It may be appropriate to compensate for value gained between the date of the expropriation and the date of the award in cases where it is demonstrated that the Claimants would, but for the taking, have retained their investment. For the reasons set out herein, however, this is not the case on the facts of these arbitrations.44

12.25  Tribunals may also decide on the treaty date of expropriation if this yields a higher compensation figure than the date of the award, for example, where the investment would not have subsequently increased in value or could have decreased. In Saint-Gobain Performance Plastics Europe v. Venezuela, the claimant submitted that the valuation date for an unlawful expropriation should be the date of the award. On the other hand, the respondent argued that, regardless of whether the expropriation was lawful or unlawful, the valuation date should be the date set out in the treaty. The tribunal found that both compensation standards advanced by the parties would result in the same amount of compensation to be paid to the claimant and consequently decided on the treaty date of expropriation:

In this regard, it has to be emphasized that both Parties are in agreement that, in case the date-of-expropriation valuation yields a higher value than the date-of-the-award valuation, the Tribunal should determine the amount of compensation to be paid to Claimant based on the value as of the date of expropriation.45

(p. 305) 12.26  In Compañía del Desarrollo de Santa Elena SA v. Costa Rica,46 the claimant argued that the fair market value of the property should be assessed on the present day value, whereas the respondent argued that it should be assessed at the time of the expropriation decree, i.e. 5 May 1978. The tribunal decided that the date of valuation should be the date of taking. It explained that the significance of identifying the date of taking lay in its bearings on the factors that may properly be taken into account in assessing the fair market value. The tribunal considered that if the relevant date were the date of the award, then it would have to pay regard to the factors that would today be present to the mind of a potential purchaser and, of these, the most important would be the knowledge that the government had adopted an environmental policy which would very likely exclude the kind of tourist, hotel, and commercial development that the claimant contemplated when it first acquired the property. If, on the other hand, the relevant date was the date of the expropriation decree then the factors that arose thereafter—though not necessarily subsequent statements regarding facts that existed as of that date—must be disregarded.47 Other tribunals have assessed damages based on post-valuation date data and events.48

12.27  In framing its case for damages, a foreign investor should assess all possible valuation dates with reference to the facts and the various treaty breaches. If there are multiple treaty breaches, the tribunal may adopt a valuation date in line with one or other of the breaches if it considers this appropriate in the circumstances of the case. In Crystallex International Corp. v. Venezuela, the tribunal declined to adopt the date of valuation proposed by the claimant, i.e. the date of crystallization of the expropriation, and instead adopted the date of the self-standing breach of FET and the first important act giving rise to the creeping expropriation.49

E.  Arbitral Practice

1.  Application of the treaty standard of compensation

12.28  In Phelps Dodge International Corp. v. Iran, the Iran–US tribunal held that Iran had taken control of SICAB, a local company established for the purpose of manufacturing in Iran and selling various wire and cable products. The claimant was one of the founders of SICAB. The tribunal held that as of 15 November 1980 control of the SICAB factory was taken by Iran thereby depriving the claimant of virtually all of its property rights in SICAB.50 The parties disagreed on the appropriate standard of compensation, both as to (p. 306) whether there was an applicable treaty standard and the requirements of customary international law in the event the treaty standard was not applicable.51 The tribunal applied the treaty standard of compensation and held that the taking required the prompt payment of ‘just compensation’ which must represent the ‘full value’ of the property.52 The tribunal did not award future profits and goodwill, which it viewed would be speculative in the circumstances. In its view, although the factory had become a ‘going concern’ prior to its taking, the tribunal could not properly ignore the obvious and significant negative effects of the Iranian Revolution on the claimant’s business.53

12.29  In Philips Petroleum Company Iran v. Iran, the Iran-US tribunal held that the claimant was entitled to the treaty standard of ‘just compensation’ representing the ‘full value of the property taken’.54 The tribunal opined that the lawful/unlawful taking distinction under customary international law, which flows largely from the Chorzów Factory case, was relevant only to two possible issues—whether restitution could be awarded and whether compensation could be awarded for any increase in the value of the property taken between the date of taking and the award. In the case before it, neither restitution nor compensation for any value other than that on the date of taking was sought by the claimant so the tribunal did not have to determine whether such remedies applied in respect to a taking to which the Treaty of Amity applied.55

12.30  In Sedco Inc. and the National Iranian Oil Company v. Iran,56 the Iran–US tribunal also applied the Treaty of Amity to the issue of compensation. It considered that international law requires full compensation for unlawful expropriation and thus held that the claimant was entitled to compensation for the full value of the expropriated interest ‘whether viewed as an application of the Treaty of Amity or, independently, of customary international law, and regardless of whether or not the expropriation was otherwise lawful’.57 In determining the value of the tangible assets taken, which, in this case were drilling rigs, the tribunal held that its task was substantially to determine the fair market value of the properties, i.e. what a willing buyer and seller would reasonably agree is the fair market price at the time of the taking.

12.31  In Wena Hotels Ltd v. Egypt,58 the tribunal found that Egypt had illegally deprived the claimant of its investment in two long-term leases to manage and develop hotels in Luxor and Cairo. The tribunal applied the treaty standard of compensation notwithstanding its finding of illegal expropriation. The treaty standard provided for the payment of ‘prompt, adequate, and effective compensation’ and that such compensation shall amount to the market value of the investment immediately before the expropriation.59

(p. 307) 12.32  In Valeri Belokon v. Kyrgyzstan,60 the tribunal applied the treaty standard of expropriation and its standard of interest despite a finding of illegal expropriation and recognition that, in cases of unlawful expropriation, the treaty is not necessarily applicable. On the date of valuation, the tribunal decided to apply the date of expropriation given that the business no longer existed and also the way in which the claimant had pleaded its case:

As mentioned, the BIT envisages valuation as of the date of expropriation. While this is not necessarily applicable in the context of illicit expropriation, the Tribunal, when evaluating a business which in effect no longer exists, and having regard to the way this case has been pleaded, retains this date and declines to adopt the December 2012 valuation date proposed by FTI.61

2.  Application of customary international law

12.33  On the other hand, tribunals have held that customary international law applies to determine compensation in cases of unlawful takings. In Amoco International Finance Corp v. Iran, the Iran–US Tribunal opined that the treaty only defines the standard of compensation in cases of lawful expropriation whereas a nationalization in breach of treaty ‘would render applicable the rules relating to State responsibility, which are not found in the Treaty but in customary international law’.62 The tribunal described the difference as being that ‘if the taking is lawful, the value of the undertaking at the time of the dispossession is the measure and limit of the compensation, while, if it is unlawful, the value is, or may be, only a part of the reparation to be paid’.63 The tribunal noted that the case law developed since Chorzów Factory has generally followed the principles set forth in the judgment, at least on the distinction between lawful and unlawful expropriation, and remarked that ‘it is particularly remarkable that all the awards which adopted the standard of restitutio relate to expropriation found unlawful’.64 Judge Brower disagreed ‘The award takes a different view, seeming to conclude that the Treaty of Amity requires interpretation against the background of customary international law, principally the judgment of the Permanent Court of International Justice in the Chorzow Factory case. I heartedly disagree. The “full equivalent of the property taken” in the Treaty of Amity is a term with plain meaning and under conventional rules should be given its natural effect’. Brower further opined that the treaty was a carefully negotiated instrument that contains express provisions ‘precisely in order to avoid to the maximum extent possible any future reference to customary international law’.65

12.34  In ADC Affiliate Ltd and ADC & ADMC Management Ltd v. Hungary,66 the tribunal held that Hungary had unlawfully expropriated the claimants’ investment in and related to the Budapest-Ferihegy International Airport. The principal issue in the damages assessment was whether the treaty standard of compensation should apply (‘just compensation corresponding to the market value of the expropriated investments at the moment of the (p. 308) expropriation’), as contended by Hungary, or the customary international law standard (‘payment of a sum corresponding to the value which a restitution in kind would bear’), as contended by the claimants. The practical significance between the two standards was that the value of the investment had risen very considerably after the date of expropriation four years earlier.67 This is illustrated by a comparison of the damages claimed: USD 68,423,638 at the time of expropriation compared to USD 76,227,279 under the restitution approach.68

12.35  The tribunal held that the customary international law standard should apply given that the BIT did not stipulate any rules relating to damages payable in the case of an unlawful expropriation, only the standard of compensation payable in cases of lawful expropriation, and to apply this standard would be to conflate compensation for a lawful expropriation with damages for an unlawful expropriation.69 The tribunal concluded that since the BIT did not contain any lex specialis rules that govern the issue of the standard for assessing damages in the case of an unlawful expropriation, it was required to apply the default standard contained in customary international law, i.e. the Chorzów Factory standard.70

12.36  In Compañía De Aguas Del Aconquija SA and Vivendi Universal SA v. Argentina,71 the tribunal held that Argentina had unlawfully expropriated a concession agreement for the provision of water and sewage services. It considered that, for lawful expropriation, the treaty mandated that compensation be based on the actual value of the investment, and that interest shall be paid from the date of dispossession; however, the treaty did not purport to establish a lex specialis governing the standards of compensation for wrongful expropriations.72 The tribunal opined that ‘there can be no doubt about the vitality of the statement of the damages standard under customary international law in the Chorzów Factory case, which has been affirmed and applied by numerous international tribunals as well as the PCIJ’s successor, the International Court of Justice.’ The tribunal further opined that it was clear that such a standard permits, if the facts so require, a higher rate of recovery than that prescribed in the treaty for lawful expropriations.73

12.37  In Siemens AG v. Argentina,74 the tribunal found that Argentina had unlawfully expropriated the claimant’s contract to implement and operate an immigration control, personal identification, and electoral information system in Argentina and had also breached its obligations to provide fair and equitable treatment and full protection and security and had adopted arbitrary measures in respect of the investment. The tribunal considered that the law applicable to the determination of compensation for a breach of such treaty obligations was customary international law and that the treaty itself only provided for compensation for expropriation in accordance with the terms of the treaty.75 The (p. 309) tribunal held that, under customary international law,76 Siemens was entitled not just to the value of its enterprise as of 18 May 2001, the date of expropriation, but also to any greater value that enterprise had gained up to the date of the award six years later, plus any consequential damages.77

12.38  In Siag and Vecchi v. Egypt,78 the tribunal held that Egypt had unlawfully expropriated the claimant’s oceanfront land on the Gulf of Aqaba on the Red Sea which it had purchased for the purpose of developing a tourist resort. The tribunal determined that, given it was an unlawful expropriation, the treaty standard of compensation for expropriation was not applicable except as to the guidance it may provide on the appropriate rate of interest. In the tribunal’s view, and endorsing the approach taken by the tribunal in Vivendi v. Argentina, the treaty did not purport to establish a lex specialis governing the standard of compensation for unlawful expropriation.79

12.39  The tribunal added that, in the case before it, not much turned on the distinction whereas in the Vivendi case the difference was relevant because it went to the question of whether the claimants were entitled to recover lost profits. By contrast, in the case before it, the claimants had not advanced a loss of profits claim per se. Rather, the recourse to a discounted cash flow analysis for expected future revenue/profit of the project was aimed at ascertaining a present market value for the property and project in 1996, and the calculation produced a result not materially different from the alternative basis upon which compensation was calculated, namely an assessment of the market value of the land at the time of the expropriation.80

12.40  In Flemingo DutyFree Shop Private Ltd v. Poland,81 the tribunal held that the treaty itself did not set out the standard of compensation for unlawful expropriation, and under customary international law as codified in Article 31(1) of the ILC Articles, the claimant was entitled to full reparation in an amount sufficient to wipe out all of the injury it has incurred due to Poland’s wrongful acts—full reparation encompassing both actual losses (damnum emergens) and loss of profits (lucrum cessans).82

12.41  In Yukos Universal Ltd v. Russia,83 the tribunal held that the text of Article 13 of the ECT may be read to import that damages for an unlawful taking need not be calculated as of the date of taking and it was therefore not required by the terms of the ECT to assess damages as of the time of the expropriation. Moreover, conflating the measure of damages for a lawful taking with the measure of damages for an unlawful taking was in the tribunal’s view, on its face, an unconvincing option.84

(p. 310) 12.42  The tribunal opined that the question of whether an investor is entitled to choose between a valuation as of the expropriation date and the date of an award is one best answered by considering which party should bear the risk and enjoy the benefits of unanticipated events leading to a change in the value of the expropriated asset between the time of the expropriatory actions and the rendering of an award.85

12.43  The tribunal identified two consequences. Firstly, investors must enjoy the benefits of unanticipated events that increase the value of an expropriated asset up to the date of the decision, because they have a right to compensation in lieu of their right to restitution of the expropriated asset as of that date. If the value of the asset increases, this also increases the value of the right to restitution and, accordingly, the right to compensation where restitution is not possible. Secondly, investors do not bear the risk of unanticipated events decreasing the value of an expropriated asset over that time period. While such events decrease the value of the right to restitution (and accordingly the right to compensation in lieu of restitution), they do not affect an investor’s entitlement to compensation of the damage ‘not made good by restitution’ within the meaning of ILC Article 36(1).86

12.44  In the tribunal’s view, it followed that, in the event of an illegal expropriation, an investor is entitled to choose between a valuation as of the expropriation date and as of the date of the award.87 The tribunal proceeded to consider the two alternative valuation dates—the first, the date of expropriation and the second, the date of the award—to determine which was higher. The total amount of the claimants’ damages based on a valuation date of the expropriation, 19 December 2004, was USD 21.988 billion, whereas the total amount of their damages based on a valuation date of the award, 30 June 2014, was significantly higher at USD 66.694 billion. Having concluded that the claimants had contributed to the extent of 25 per cent to the prejudice they suffered at the hands of the Russian Federation, the tribunal reduced the amount of damages awarded by 25 per cent to USD 50,020,867,798.88

12.45  In ConocoPhillips Petrozuata BV. and ors v. Venezuela,89 the claimants contended that their investments in three oil projects in Venezuela, two extra-heavy oil projects located in the Orinoco Oil Belt region, the ‘Petrozuata Project’ and the ‘Hamaca Project’, and the ‘Corocoro Project’, an offshore project for the extraction of a light to medium crude oil, was unlawfully expropriated through tax measures and a nationalization without compensation. The claimants submitted that if a taking is unlawful, the date of the award and not the date of the taking is, in general, the date of valuation. They argued that, as a result of improving market conditions in the energy sector, the three projects had increased in value since the final act of confiscation by Venezuela.90

(p. 311) 12.46  The tribunal agreed that in the case of an unlawful taking the date of valuation is, in general, the date of the award.91 The tribunal opined that the BIT standard of compensation (the market value at the date of taking) applied only to lawful taking of an investment in that the provision establishes a condition to be met if the expropriation is, in all other respects, in accordance with the article. Pointing to the Chorzów Factory case, the tribunal considered that the PCIJ did not determine reparation in accordance with the provisions of the Convention before it because it was concerned with a dispossession in breach of those provisions. Instead, it decided in accordance with ‘the essential principle’ of full reparation, which is a principle of customary international law, not dependent on the Convention provisions.92 The tribunal held that the taking was unlawful for the reason that Venezuela had failed to negotiate compensation in good faith for the taking of the ConocoPhillips assets in the three projects on the basis of market value as required by Article 6(c) of the BIT, and that, consequently, the date of the valuation was the date of the award.93

3.  A different approach

12.47  In Quiborax SA and Non Metallic Minerals SA v. Bolivia,94 the tribunal found that the claimants’ mining investments in Bolivia were subject to direct expropriation as far as Non-Metallic Minerals SA was concerned, and indirect expropriation as far as Quiborax was concerned, and that this failed to comply with the legality conditions set out in the BIT for expropriation. Consequently, the claimants were entitled to full reparation of the damages suffered.95 The tribunal held that the treaty standard of compensation did not apply to unlawful expropriation, which was governed by the full reparation principle as articulated by the PCIJ in the Chorzów Factory case and later expressed in the ILC Articles.96

12.48  The tribunal added that there is authority to suggest that, in certain cases, the State’s obligation to make full reparation may be reduced after considering certain mitigating factors, such as remoteness of the damage, intervening or concurrent causes, the existence of contributory negligence on the part of the investor, or the application of the principle of proportionality.97

12.49  However, the tribunal disagreed on the valuation date. Whereas the majority tribunal considered that the assessment of the ‘fair market value’ required an ex post valuation, i.e. valuation of the damage on the date of the award taking into consideration information available then,98 the dissenting arbitrator, Stern, was of the view that the calculation (p. 312) of due compensation should always assess the damage as seen at the time of the expropriation and should never use ex post information. The dissenting arbitrator opined that, in the case of a lawful expropriation, damages should be limited to what has been lost. In contrast, in the case of unlawful expropriation, added to this should be damages for what the investor expects at the time of the expropriation in terms of future profits and expansion.99

12.50  The dissenting arbitrator opined, firstly, that a proper reading of Chorzów Factory is that the compensation for lawful expropriation is just compensation represented by the value of the undertaking at the moment of dispossession, whereas reparation in case of unlawful expropriation is restitution in kind or what would have been ‘in all probability’ its value at the time of the indemnification, i.e. the time of the judgment;100 whereas, the majority tribunal considered full reparation to be that as reconstructed in the world existing at the time of the award, which the dissenting arbitrator noted might be a completely different world than the one existing at the time of the expropriation.101 Secondly, that the difficulties faced by the majority tribunal in applying the DCF method at the time of the award were inherent in their choice to use ex post information, which is not adapted to such method.102 The dissenting arbitrator added:

It is clear that this method [the DCF] is based on the projection into the future of the past results as well as the business plan for the future of the going concern which has been expropriated. The further in the future, the less reliable the forecasts are, for example, many enterprises do not fulfil their business plan, their directors can change, their board can make wrong strategic decisions and so on. This uncertainty is so to say compensated by the fact that the further in the future a cash flow is considered, the more it will be discounted. … If the date of the evaluation is shifted to the date of the award – and in our case it was a projection of almost 10 years from the expropriation – the data concerning the enterprise is of very little reliability … It just confuses the ‘but for’ world and the real world, without rendering the ‘but for’ world more real.103

Thirdly, an ex post valuation means a valuation taking into account events and evolutions which take place after the illegal act. This, in the dissenting arbitrator’s opinion, is arbitrary as the facts existing after that date have nothing to do with the facts of the case.104 Moreover, if ex post information is used the amount of damages granted will vary with the date of the award. For example, if the award had been rendered a year earlier or three years later, the facts would likely have been different, and the award different in amount. The dissenting arbitrator gave an example:

To illustrate this, let us just imagine a plant which has been expropriated. Shortly before the time of the award, it has been destroyed by a hurricane. Using ex post information and (p. 313) valuing the compensation that would replace restitution, would result in refusing any compensation to the expropriated investor, which does not seem fair.105

And a second one:

If ex post valuation is accepted, in case of a complete collapse in the price of a commodity, the investor could see its compensation reduced to nil, while the investor had reasonable expectations of future profits at the time of the expropriation. This is a supplementary—and quite fundamental—reason why I am reluctant to accept ex post information.106

12.51  Fourthly, the dissenting arbitrator opined that if the date of the award with ex post information is only used when it is in favour of the expropriated investor this would be against a fair interpretation of international investment law. If, in order to be coherent, the date of the award with ex post information is always used, this can result in injustice for the expropriated investor. The fair solution, in her view, is to be based on what was foreseeable at the date of the expropriation, which she considered was indeed in line with the respect of the investor’s legitimate expectations.107 Fifthly, a basic rule on reparation is causation—the damage that has to be compensated has to be the result of the illegal act—whereas, evolutions posterior to the illegal act (ex post information) that might cause a diminution or an increase of the damage suffered, are not caused by the illegal act and therefore should not be taken into account when calculating the reparation due.108 Sixthly, in the overwhelming majority of cases having dealt with an unlawful expropriation, the date of the expropriation was adopted in order to calculate damages, based on what was foreseeable at that date. The decisions adopting an ex post valuation are extremely few:

As a matter of fact, the majority itself, in the footnote relating to the ‘several investment arbitration tribunals’, mentions only four treaty cases: ADC v. Hungary, Siemens v. Argentina, ConocoPhilips v. Venezuela and Yukos v. Russia. These are—to the best of my knowledge—the ONLY cases in almost thirty years of investment arbitration adopting the date of the award and ex post data, compared to the hundreds of cases relying on the date of expropriation and what was foreseeable on that date, in other words, the hundreds of awards which have granted, in case of expropriation, both lawful and unlawful, the fair market value of the expropriated property, evaluated at the date of the expropriation, with the knowledge at that time.109

12.52  On another view, and in line with the majority tribunal, it could be argued that, in the case of unlawful expropriation, the investor should be entitled to choose whichever date of valuation is more favourable to it—whether that be the date of expropriation or the date of the award—as this is consistent with the principle of full reparation under customary international law.110 The issue with awarding only damages for what the investor expects at the time of the expropriation in terms of future profits is that this rules out the possibility that the investor could have made even more (non-speculative) profit through the lifetime of the investment which it was not expecting to make. On the other hand, the approach taken by the majority tribunal—the DCF to include non-speculative profit—takes into (p. 314) account the reality of the years subsequent to the expropriation. The caveat, however, must be that any damages awarded should not be speculative.

12.53  The dissenting arbitrator based much of her argument on the Chorzów Factory case and interpreted it to mean that full reparation is the one foreseen in all probability at the time of the expropriation. However, in Chorzów Factory, the questions put by the PCIJ to the expert enquiry considered two scenarios—the value of the investment at the time of the expropriation plus ‘probable profit’ and the value of the investment at the time of the award.

12.54  Finally, the dissenting arbitrator points out that only a handful of awards have awarded damages for illegal takings at the time of the award. But this must be put in context. In other cases, the investors may have elected the date of valuation to be the date of the expropriation or the tribunal may have considered this date more appropriate. The reasons for this vary—for example, the investment could have decreased (or not increased) in value post expropriation or damages post expropriation may have been too speculative to make out. The tribunal may also have rejected the investor’s submissions on the application of customary international law, instead deciding to apply the treaty standard of compensation notwithstanding the illegality of the act.

F.  Re-conceptualizing the Approach to Damages

12.55  Given the growing relevance of investment treaty law to global investment, it is timely to debate the merits (or otherwise) in re-conceptualizing the approach to damages. Brownlie’s Separate Opinion in CME Czech Republic v. Czech Republic111 is an example of a novel approach, albeit premised on the treaty standard of ‘just compensation’ which allows for a greater degree of latitude than other treaty standards.

12.56  In this case, the majority tribunal awarded the claimant USD 269.814 million based on the DCF method of calculating damages.112 Brownlie opined that the damages awarded should be significantly lower in the sum of USD 160.87 million.113 In Brownlie’s opinion this figure more effectively reflected the provisions of the treaty than the methodology adopted in the Final Award.114 Brownlie criticized the DCF method in the case, opining that its application cannot be superimposed on the legal criteria but must be compatible with the treaty:

The difficulty which then appears is the fact that the expert reports submitted by the parties make no reference to the Treaty criteria and are based principally upon the currently fashionable DCF method. There is no basis for thinking that the DCF method is to be applied independently of legal criteria and its application cannot be superimposed on the legal criteria but must be compatible therewith.115

12.57  The claim was brought under the Netherlands–Czech and Slovak Federal Republic BIT signed on 29 April 1991. The expropriation provision in the BIT referred to the payment (p. 315) of ‘just compensation’ and not to the ‘fair market value’. The majority tribunal awarded compensation on the basis of the ‘fair market value’. Brownlie criticized the reliance by the majority tribunal on the most-favoured-nation (MFN) provision in the Netherlands–Czech BIT to support an application of ‘fair market value’ to the compensation standard. Brownlie opined that the application of the MFN clause to the compensation provisions of the BIT in order to incorporate the substantially different formulation in the United States–Czech Republic BIT signed on 22 October 1991 was an unattractive hypothesis: in the first place, it involves a strange view of the intention of the parties and secondly, the express choice of a compensation clause becomes nugatory if the MFN clause applies in this form. Rather, in Brownlie’s view, the presumption must be that the clause promises MFN treatment only in matters of treatment of an investment, and not to the process of dispute settlement.116 Brownlie considered that the language of the MFN provision clearly indicated the standards of treatment to which it applied.

12.58  The treaty standard of compensation provided that the measures be accompanied by provision for the payment of ‘just compensation’ and that this should represent the ‘genuine value’ of the investments affected. Brownlie considered the formula ‘just compensation’ to be significant and contrasted this to other treaties entered into by the Czech Republic which expressly included reference to the standard of compensation as the ‘fair market value’.117 Brownlie noted that the standard of compensation in United Nations’ General Assembly Resolution 1803 (XVII) of 1962 was ‘appropriate compensation’ and also noted Professor Schachter’s observations that the valuation of compensation of a going concern may be subject to legitimate expectations and actual conditions:

The standard of ‘appropriate’ compensation or its near–equivalents ‘just’ and ‘equitable’ compensation leaves considerable latitude to the parties in negotiation or to a third–party arbiter. In many cases, especially those involving a single property or investment, appropriate or just compensation would seem to require payment of ‘full market value’ where that can be determined. The value of the enterprise as a ‘going concern’ capitalising income may also be an appropriate standard subject to legitimate expectations and actual conditions.118

12.59  Brownlie opined that, whereas the treaty provisions make no explicit reference to a limitation placed upon the right to compensation based upon a reasonable rate of return or the legitimate expectations of the investor, it is clear that such a limitation forms an inherent part of the concept of investment and the principle of the ‘protection of investments’ embodied in the treaty.119 The treaty is not related to the protection of ‘foreign property’, but to the protection of ‘investments’ and all this in the context of the promotion of the economic development of the Contracting Parties. Brownlie added that the application of the treaty provisions necessarily involves recognition of three distinct but related elements:

  • First: the nature of an investment as a form of expenditure or transfer of funds for the precise purpose of obtaining a return.

  • Secondly: the element of reasonableness, which rules out the compensation of returns which go beyond the legitimate expectations of the investor.

  • (p. 316) Thirdly: the element which derives from the general principle that merely speculative benefits, based upon unproven economic projections, do not count as investment or as returns.120

12.60  Brownlie further opined that the treaty criteria of reasonableness and a reasonable rate of return constitute the alter ego of the concept of legitimate expectations. Such expectations will vary from case to case but they can be understood to include the following in the case of a BIT:

  • First: that the host State is not accepting a risk which will have the consequence of paying compensation at a level which would cause catastrophic economic consequences for the host State and its population.

  • Second: that an investment carries the expectation that it will be profitable, but only on a basis of reasonable expectations.

  • Third: that explicit indications of the investor’s expectation of profitability will provide a primary criterion of what is a reasonable rate of return.121

12.61  Brownlie proceeded to calculate the damages based on the investment made, retained profits and foreseeable profits. Relying on the treaty standard of ‘just compensation’, Brownlie concluded that it was reasonable to assume that the principle of ‘genuine value’ rules out uncertain and speculative future benefits.122 Brownlie calculated the damages based on the value of the actual investments as USD 49.3 million, to which should be added the retained profits: the dividends received by CME, and its predecessors.123

12.62  In conclusion, Brownlie considered that the concept of a reasonable rate of return has several connotations and that probably its most important role is to supplement the concept of ‘investments affected’ to include foreseeable profits and to exclude speculative benefits. In this case, the foreseeable profits could be computed on the basis of the Business Plan.124 Lastly, Brownlie opined that ‘just compensation’, it is to be presumed, is incompatible with profit levels derived from a dominant position in the media market and that, in the circumstances, a treaty-based discount factor of 10 per cent of the total net profit would provide the necessary assurance of compatibility with the concept of ‘just compensation’. Applying this discount, the net profits fit for compensation totalled USD 76.87 million.125

12.63  This reconceptualization of damages was certainly novel albeit in the context of Brownlie’s interpretation of limitations inherent in the concept of investment and the principle of the ‘protection of investments’ embodied in the treaty and in the State’s and the foreign investors’ legitimate expectations. This interpretation would, no doubt, be challenged by foreign investors as not reflective of a reality where States encourage foreign investment knowing full well the consequences under international law of violating treaty norms and that foreign investors legitimately expect full compensation for unlawful expropriation. Moreover, in this case, Brownlie had the flexibility to advance arguments given the treaty standard of compensation was ‘just compensation’—this would be different if the compensation standard was a less flexible one.

Footnotes:

1  Rubins and Kinsella, International Investment, Political Risk and Dispute Resolution: A Practitioner’s Guide, Oceana Publications, 2005, p. 179, ‘In this context, “prompt” means that at or before the time of the taking, either compensation has been paid or provision has been made for a determination of the amount of compensation to be paid, with interest at the time of taking. The term “effective” indicates that compensation must be made in a freely- convertible currency … “Adequate” compensation … means that the investor is paid the full value of the property taken, which in the case of an on-going business will normally correspond to the going-concern value.’ Drahozal and Gibson, The Iran-US Claims Tribunal at 25, Oxford University Press, 2007, p. 230, explain that the HULL formula required the payment of ‘full value’ or ‘going concern value’ to the investor, generally interpreted to mean fair market value or the amount which a willing buyer might pay a willing seller if the transaction occurred on an open market.

2  OECD Report, Indirect Expropriation and the Right to Regulate in International Investment Law, September 2004, p. 2, footnote 1.

3  Letter from Secretary of State Cordial Hull to the Mexican Ambassador dated 21 July 1938, Foreign Relations of the United States Diplomatic Papers, 1938, the American Republics, Vol. V.

4  Fawcitt quoting the United States Notes to Mexico of 21 July 1938 and 3 April 1940. Fawcitt, Some Foreign Effects of Nationalization of Property, British Yearbook, 1950, 354 at footnote 226.

5  CME Czech Republic BV v. The Czech Republic, UNCITRAL, Final Award of 14 March 2003.

6  Ibid, para. 497.

7  World Bank Group’s, Report on the Legal Framework for the Treatment of Foreign Investment, 1992.

8  Ibid, para. 40 of the Report.

9  Ibid, Guideline IV (7).

10  Ibid, Guideline IV (8).

11  For examples of ‘prompt, adequate, effective’ together with ‘market value’ see Israel–Croatia BIT signed on 1 August 2000, Article 5; Finland–Brazil BIT signed on 28 March 1995 (not ratified), Article 5; Greece–Albania BIT signed on 1 August 1991, Article 4(2); Egypt–United Kingdom BIT signed on 11 June 1975, Article 5(1); Spain–Nigeria BIT signed on 9 July 2002, Article 6.

12  Article 13 (Expropriation) of the ECT reads, ‘Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the Investment (herein referred to as the “Valuation Date”. Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date. Compensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of payment.’

13  Article 14 (Expropriation and Compensation) of the ASEAN Comprehensive Investment Agreement reads: The compensation referred to in sub-paragraph 1(c) shall:

  1. (a)  be paid without delay;

  2. (b)  be equivalent to the fair market value of the expropriated investment immediately before or at the time when the expropriation was publicly announced, or when the expropriation occurred, whichever is applicable;

  3. (c)  not reflect any change in value because the intended expropriation had become known earlier; and

  4. (d)  be fully realisable and freely transferable in accordance with Article 13 (Transfers) between the territories of the Member States.

14  Article 10(7) (Expropriation and Compensation) of the CAFTA reads: on payment of prompt, adequate, and effective compensation in accordance with paras 2–4; …

  1. 2.  Compensation shall:

    1. (a)  be paid without delay;

    2. (b)  be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (‘the date of expropriation’);

    3. (c)  not reflect any change in value occurring because the intended expropriation had become known earlier; and

    4. (d)  be fully realizable and freely transferable.

15  Article 1110(2) NAFTA reads, ‘Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (“date of expropriation”), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.’ Article 1110(3) ‘Compensation shall be paid without delay and be fully realizable.’

16  OIC Agreement, Article 13(2).

17  See e.g., Kuwait–Iraq BIT signed on 6 December 2013, Article 4, ‘… in return for just and immediate compensation; the value of the compensation shall be equal to that of the expropriated investments at the time of expropriation.’

18  For example, Angola–UK BIT, Article 5(1) ‘against prompt, adequate compensation. Such compensation shall amount to the genuine value of the investment expropriated immediately before the expropriation or before the impending expropriation became public knowledge.’

19  Schacter, International Law in Theory and Practice, M. Nijhoff Publisher, 1991, p. 324. This passage is relied on by Professor Brownlie in his Separate Opinion on the Issues at the Quantum Phase in CME Czech Republic BV v. Czech Republic, 14 March 2003 at para. 31 at n. 5.

20  UNCTAD Report, 2000, UNCTAD/ITE/IIA/2, Bilateral Investment Treaties 1995–2006: Trends in Investment Rule Making, Preface.

21  Schwebel, The Influence of Bilateral Investment Treaties on Customary International Law, Proceedings of the Annual Meeting (American Society of International Law), Vol. 98, 31 March—3 April 2004, p. 27.

22  Coe and Rubins, Chapter 17, Regulatory Expropriation and the Tecmed Case: Context and Contributions, International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, edited by Todd Weiler, Cameron May, 2005, p. 629. They point also to the rival view that favours a more flexible approach, such as ‘appropriate’ or ‘fair’ compensation. And that the ‘contemporary trend is towards “fair market value” as the proper measure of compensation, largely because such a formula most closely matches the PCIJ’s widely-accepted view, expressed in the Chorzów Factory case.’

23  Bernhard’s Encyclopedia for International Law, 1999, Vol. 2, p. 323.

24  Reinisch, Chapter 9, Legality of Expropriation, Standards of Investment Protection, edited by August Reinish, Oxford University Press, 2008, pp. 194 and 195.

25  Schachter submits that the Hull Formula does not represent international customary law. See Schachter, Editorial Comment titled Compensation for Expropriation, 78(1) The American Journal of International Law, ,1984, p. 121 and Schachter, Compensation Cases—Leading and Misleading, The American Journal of International Law, 1985, p. 420.

26  Brownlie, Separate Opinion on the Issues at the Quantum Phase in CME Czech Republic BV v. Czech Republic, 14 March 2003, para. 31 at n. 5.

27  Sornarajah, The International Law of Foreign Investment, Cambridge University Press, 2004, p. 441.

28  McLachlan QC, Shore, and Weiniger, Chapter 9, Compensation, International Investment Arbitration: Substantive Principles, 2nd Edition, Oxford University Press, 2017, paras 9.09 and 9.11.

29  Ripinsky and Williams, Damages in International Investment Law, British Institute of International and Comparative Law, 2015, para. 4.1.2(d). Ripinsky and Williams conclude from a study of investment treaties that the requirement of ‘adequate’ compensation is prevalent in investment treaties usually as part of the formula of ‘prompt, adequate and effective compensation’. It can be found in 75 per cent of all model BITs and around 70 per cent of examined investment treaties, including the multilateral treaty with the broadest membership—the ECT. They also note that a majority of investment treaties require, as a condition of lawful expropriation, payment of compensation equivalent to the fair market value of the expropriated investment (para. 4.1.2(b)).

30  ADC Affiliate Ltd and ADC & ADMC Management Ltd v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award of 2 October 2006, para. 496. The tribunal explains: ‘The present case is almost unique among decided cases concerning the expropriation by States of foreign owned property, since the value of the investment after the date of expropriation (1 January 2002) has risen very considerably while other arbitrations that apply the Chorzów Factory standard all invariably involve scenarios where there has been a decline in the value of the investment after regulatory interference. It is for this reason that application of the restitution standard by various arbitration tribunals has led to use of the date of the expropriation as the date for the valuation of damages.’

31  Dolzer and Schreuer, Principles of International Investment Law, 2nd Edition, Oxford University Press, 2012, p. 100.

32  Ripinsky and Williams, Damages in Investment Law, British Institute of International and Comparative Law, 2015, para. 4.1.3(d). See also Smutny, Principles relating to Compensation In The Investment Treaty Context IBA Annual Conference, 2006. On the distinction between lawful and unlawful expropriation as regards the remedy available in the context of a treaty claim, Smutny submits, ‘This is a question that merits a more full discussion than undertaken here, but one may briefly observe, as noted above, that there is a distinction between the content of the treaty obligation as regards expropriation and the remedy for the failure of a State to fulfill that obligation. The State party to the treaty accepts the conventional obligation that if it expropriates property, it may do so only under certain conditions—i.e., it will do so only where there is a public purpose; it will do so in accordance with due process; and it will pay compensation according to a particular standard (typically against prompt payment of the fair market value in a convertible currency, etc.). When a State expropriates in a manner inconsistent with its treaty obligation, it has violated the treaty. It is, by definition, an unlawful act. The State is then under an obligation to make full reparation for any injury caused by the unlawful act. The reparation most usually awarded is compensation for the damage.’

33  Marboe, Calculation of Compensation and Damages in International Investment Law, 2nd Edition, Oxford University Press, 2017, para. 3.81.

34  Ibid, para.3.114.

35  Reinisch, pp. 199–200 at n. 24.

36  Sheppard, The Distinction Between Lawful and Unlawful Expropriation, Investment Arbitration and The Energy Charter Treaty, edited by Clarisse Ribeiro, JurisNet, 2006, pp. 197–9 . Sheppard argues that the primary purpose of the conduct requirements might be to remind Sates that they should not take property of aliens in a capricious manner. He further argues that they would also arguably be relevant where the claimant seeks restitution, which requires a finding that the expropriation was unlawful. Likewise, the conduct requirements would be relevant where the claimant seeks only a declaration that the host State had committed an internationally wrongful act.

37  Ibid, pp. 195 and 197.

38  Ibid, p. 184.

39  Ibid, p. 196.

40  McLachlan, Shore, and Weiniger, International Investment Arbitration, Substantive Principles, 1st Edition, Oxford University Press, 2007, p. 331, para. 9.67.

41  McLachlan, Shore, and Weiniger, p. 431, para. 9.76 at n. 28.

42  Rubins, Sinha, and Roberts, Chapter 7, Approaches to Valuation in Investment Treaty Arbitration, Contemporary and Emerging Issues on the Law of Damages in International Investment Law, edited by Christina Beharry, Brill Nijhoff, 2017, p. 176.

43  In Teinver SA, Transportes de Cercanías SA and Autobuses Urbanos del Sur SA v. The Argentine Republic, ICSID Case No. ARB/09/1, Award of 21 July 2017, para. 1115.

44  Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Final Award of 28 February 2010, dispatched 3 March 2010, paras 513–17.

45  Saint-Gobain Performance Plastics Europe v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/12/13, Decision on Liability and Principles of Quantum of 30 December 2016, para. 611.

46  Compañía del Desarrollo de Santa Elena SA v. Costa Rica, ICSID Case No. ARB/96/1, Final Award, IIC 73 (2000), dispatched 17 February 2000.

47  Ibid, para. 84.

48  In Flemingo DutyFree Shop Private Ltd v. the Republic of Poland, the tribunal decided that the valuation date was the date the lease agreements were terminated. The tribunal held that ‘the discount rate and a correct assessment of the damages can be based upon post-valuation date data and events. The use of such data can help with a more precise assessment of the damages. The Tribunal prefers to establish the discount rate on the basis of post-valuation date data, instead of calculating the discount rate on the valuation date and allocating pre-judgment interest to reflect the time value of money up to the date of the Award.’ UNCITRAL, Final Award, 12 August 2016, paras 904 and 899.

49  Crystallex International Corp. v. Venezuela, Award, ICSID Case No. ARB(AF)/11/12, IIC 984 (2016), dispatched 4 April 2016, paras 854–7.

50  Phelps Dodge International Corp. v. The Islamic Republic of Iran, Award No. 217-99-2, 10 Iran–US CTR 21, 19 March 1986, The Merits, para. 23.

51  Ibid, para. 24 (Valuation).

52  Ibid, para. 28.

53  Ibid, para. 30.

54  Philips Petroleum Company Iran v. The Islamic Republic of Iran, Award No. 425-39-2, 21 Iran–US CTR 79, 29 June 1989, paras 106 and 109.

55  Ibid, para. 110.

56  Sedco Inc. and the National Iranian Oil Company v. The Islamic Republic of Iran, Award No. ITL 59-129-3, 27 March 1986.

57  Ibid, pp. 7 and 13.

58  Wena Hotels Ltd v. Egypt, ICSID Case No. ARB/98/4, Award, (2004) 6 ICSID Rep. 89, (2002) 41 ILM 896, IIC 273 (2000), 8 December 2000.

59  Ibid, para. 118.

60  Belokon v. Kyrgyzstan, Ad Hoc Tribunal (UNCITRAL), Award, IIC 760 (2014), 24 October 2014.

61  Ibid, para. 309.

62  Amoco International Finance Corp. v. The Islamic Republic of Iran, Award No. 310-56-3, 10 Iran–US CTR 1221, 14 July 1987, para. 189.

63  Ibid, para. 197.

64  Ibid, para. 206.

65  Ibid, Concurring Opinion of Judge Brower, para. 16.

66  ADC Affiliate Ltd and ADC & ADMC Management Ltd v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award of 2 October 2006.

67  Ibid, para. 496.

68  Ibid, para. 243.

69  Ibid, para. 481.

70  Ibid, para. 483.

71  Compañía De Aguas Del Aconquija SA and Vivendi Universal SA v. Argentine Republic, Case No. ARB/97/3, Award of 20 August 2007.

72  Ibid, para. 8.2.3.

73  Ibid, para. 8.2.5.

74  Siemens AG v. Argentina, ICSID Case No. ARB/02/8, IIC 227 (2007), 6 February 2007.

75  Ibid, para. 349.

76  ILC Article 36 ‘Compensation’ and the Chorzów Factory case.

77  Siemens AG v. Argentina, Award and Separate Opinion, para. 352 at n. 75.

78  Siag and Vecchi v. Egypt, ICSID Case No. ARB/05/15, Award, IIC 374 (2009), 11 May 2009, dispatched 1 June 2009.

79  Ibid, para. 539.

80  Ibid, para. 541.

81  Flemingo DutyFree Shop Private Ltd v. Poland, Award, IIC 883 (2016), 12 August 2016, Permanent Court of Arbitration (PCA).

82  Ibid, para. 865.

83  Yukos Universal Ltd v. Russian Federation, PCA Case No. AA 227, Final Award, IIC 652 (2014), ICGJ 481 (PCA 2014), 18 July 2014.

84  Ibid, para. 1765.

85  Ibid, para. 1766.

86  Ibid, paras 1767–8.

87  Ibid, para. 1767.

88  Ibid, paras 1826–7.

89  ConocoPhillips Petrozuata BV and ors v. Venezuela, ICSID Case No. ARB/07/30, Decision on Jurisdiction and Merits, IIC 605 (2013), 3 September 2013.

90  Ibid, para. 337. The claimants relied on the principle of full reparation in Chorzów Factory (Merits) and Articles 31(1), 34, and 36(2) of the ILC Articles 2001. The claimants pointed to subsequent cases where the ILC Articles, supported in their commentaries by reference to the authorities, have been regularly referred to, including ICSID awards and decisions, as codifying or declaring customary international law, e.g. ADC v. Hungary; LG&E v. Argentine Republic; CMS Gas Transmission Company v. Argentine Republic; and Siemens AG v. Argentine Republic, and other decisions and awards summarized in the UN Secretariat Reports A/62/62, paras 103–15, and A/65/76, paras 28–43). A number of those cases, in addition to citing the ILC Articles and Chorzów Factory, refer to a consistent body of earlier decisions including Texaco v. Libya (1977) and Amoco v. Iran (1987), (para. 339 of the award).

91  Ibid, para. 343.

92  Ibid, para. 342.

93  Ibid, para. 401. At para. 362 the tribunal had commented on the requirement to negotiate compensation in good faith, ‘The requirements for prompt payment and for interest recognise, in accordance with the general understanding of such standard provisions, that payment is not required at the precise moment of expropriation. But it is also commonly accepted that the Parties must engage in good faith negotiations to fix the compensation in terms of the standard set, in this case, in the BIT, if a payment satisfactory to the investor is not proposed at the outset.’

94  Quiborax SA and Non Metallic Minerals SA v. Bolivia, ICSID Case No. ARB/06/2, Award, IIC 739 (2015), dispatched 16 September 2015.

95  Ibid, para. 329.

96  Ibid, para. 326 citing ILC Articles 1 and 31.

97  Ibid, para. 330.

98  Ibid, para. 370.

99  Quiborax SA and Non Metallic Minerals SA v. Bolivia, ICSID Case No. ARB/06/2, Award, IIC 739 (2015), Partially Dissenting Opinion of 7 September 2015, para. 81.

100  Ibid, para. 23. The PCIJ stated that ‘reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed’, the Court concluded that an unlawful expropriation ‘involves the obligation to restore the undertaking and, if this be not possible, to pay its value at the time of the indemnification, which value is designed to take the place of restitution which has become impossible’.

101  Ibid, paras 23 and 24.

102  Ibid, para. 62.

103  Ibid, para. 63.

104  Ibid, para. 83.

105  Ibid, para. 86.

106  Ibid, para. 103.

107  Ibid, paras 59 and 60.

108  Ibid, paras 97 and 101.

109  Ibid, para. 43.

110  ILC Article 31. ILC Article 36 further provides that ‘[t]he State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby.’

111  CME Czech Republic v. Czech Republic, Ad Hoc Tribunal (UNCITRAL), Partial Award, IIC 61 (2001), (2002) 9 ICSID Rep. 121, (2002) 14(3) World Trade and Arb. Matl 109, 13 September 2001.

112  Ibid, para. 620.

113  Separate Opinion at n. 26, para. 119.

114  Ibid, para. 12.

115  Ibid, para. 105. Professor Brownlie also opined at paras 99 and 100 that the ‘the DCF locutions simply do not overlap with the language of the Treaty’ and the DCF analysis ignores the principles of general international law which are applicable.

116  Ibid, para. 11.

117  Ibid, para. 24.

118  Ibid, para. 31 citing Schacter, International Law in Theory and Practice, M. Nijhoff Publisher, 1991, p. 324.

119  Ibid, para. 33.

120  Ibid, para. 34.

121  Ibid, para. 58.

122  Ibid, para. 69.

123  Ibid, para. 110.

124  Ibid, para. 116.

125  Ibid, para. 117.