The Doctrine of Indirect Expropriation in Light of the Practice of the Iran-United States Claims Tribunal

in The Journal of World Investment & Trade
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The Journal of World Investment & Trade

Law • Economics • Politics

References

Rudolf Dolzer, Indirect Expropriations: New Developments? 1 1 N.Y.U. Envy'1 L. 64-65 (2002). 2 Id. at 65. ' Id. at 68 (citing CM/' Czech Ry. B. V. v. Czcrh Rey, Partial Award, para. 606 (13 Sept. 2001); Under v. Czech Rep., Final Award, para. 203 (3 Sept. 2001), both available at http://www.investrnentrlaims.com/ oa2b.html#b.) Similar contlicting arbitral awards were characteristic of the earlier era. Cf the outcomes of the classic Libyan nationalization arbitrations: B13 Exploration Company (Libya) Ltd. v. Government of the Libyan Arab Republic, 53 LL.R 297 (1979); Libyan Arabian Oi1 Company (Liamco) v. Government of the Libyan Arab Republic, 20 I.L.M. 1 (1981); Texaco Overseas I'etroleum Company and California Asiatic Oi! Company v. Government of the Libyan Arab Rcyublir, 53 LL.R. 422 (1979). 4 Dolzer, supra note 1, at 68.

5 Jan Paulsson, Indirect Expropriation: Is the Right to Regulate at Risk? Paper presented on 12 Dec. 2005 in Paris at a symposium on "Making the Most of International Investment Agreements," organized by ICSID, OECD and UNCTAD, published in 3 (Issue 2) TDM (Apr. 2006). 6 Id. at 1. ' For recent contributions see, e.g., L. Yves Fortier & Stephen L. Drymer, Indirect Expropriation irt the Law of International Investment: I know it When I see it, or Caveat Investor, 19 ICSID Review - Foreign Investment L. J. 293 (2004); Andrew Newcombe, The Boundaries of Regulatory Expropriation in International Law, 20 ICSID Review - Foreign Investment L. J. 1 (2005); Jan Paulsson & Zachary Douglas, Indirect Expropriation in Investment Treaty Ar6itration, in N. Horn & S. Kroll (Eds.), Arbitrating Foreign Investment Disputes: Procedural and Substantive Legal Aspects 145 (2004); W. Michael Reisman & Robert D. Sloane, Indirect Expropriation and Its Valuation in the Bit Generation, 74 Brit. Y.B. Int'l L. 115 (2003); Christoph H. Schreuer, 71Ie Concept of Expropriation under the ECT and other Investment Protection Treaties, in Clarisse Ribeiro (Ed.), Investmen Arbitration and the Energy Charter Treaty 108 (2006); Thomas Walde & Abba Kolo, Environrnental Regulation, Investment Protection and 'Regulatory Taking' in International Law, 50 Int'l & Comp. L.Q. 811 (2001).

8 The police powers doctrine is a classic doctrine of international law, as explained infra. In coining the term "effects doctrine" I have adapted a term used by Prof. Dolzer. See Dolzer, supra note 1, at 79-80 (discussing the "sole effects" doctrine). _ 9 Id. at 79. Id. at 79-80.

n The Tribunal's practice on expropriation claims is substantial: it covers some sixty awards rendered over a period spanning close to twenty years. Sce Maurizio Brunetti, 77re Iran-Llrrited States Clams Tribunal, NAFI'.1 4 Chapter 11, aud the Dactrine oflndircct 6'.tpropriatiorr, 1 Chicago J. Int 1 L. 203, 205 (2001). 12 Declaration of the Government of the Democratic and Popular Republic of Algeria Concerning the Settlement of Claims by the Government of the United States of America and the Govemment of the Islamic Republic of Iran ("Claims Settlement Declaration") (19 Jan. 1981), reprinted in 1 Iran-U.S. C.1'.R. 9 (emphasis added). 'j See, e.g., Pnpe & Talbot, Inc. v. Canada, Interim Award (26 June 2000), para. 104, available at http://www.invcstrnentclaims.com/oal.html.

14 For discussion see, e.,e., George H. Aldrich, Jurisprudence of the Iran-United States Claims Tribunal (1996) at 173; Charles N. Brower & Jason D. Brueschke, the Iran-United States Claims Tribunal (1998) at 381-82; Brunetti, supra note 11, at 204-05, 210-11. It is another matter whether the Tribunal should have classified "indirect" expropriations such as deprivations of property as "expropriations" or rather as "other measures affecting property rights." For an argument supporting the latter view see Allahyar Mouri, The International Law of Expropriation as Reflected in the Work of the Iran-U.S. Claims Tribunal 65-174 (1994). It would be instructive to compare the Tribunal practice under the "other measures" standard to investment arbitration practice under the fair and equitable treatment standard; both standards deal with measures that fall short of expropriation. These claims arose out of two Iranian laws enacted in 1979, which nationalized all insurance companies and banks operating in Iran. See, american International Group, Inc., et al. v. Islamic Repu6lic ()fIrati, et al., Award No. 93-2-3 (19 Dec. 1983), reprinted in 4 Iran-U.S. C.T.R. 96; ISA Corp. v. Covernment ()fthe Islamic Republic of Iran, Award No. 184-161-1 (13 Aug. 1985), reyrinted in 8 Iran-U.S. C.T.R. 373. rb Iran's petroleum industry was nationalized de fncto through a series ofmeasures taken in 1979 and 1980. For discussion see Aldrich, supra note 14, at 174, 188-96. .See Black's Law Dictionary (6th ed.), at 196 (defining "indirect" as "[n)ot direct in relation or connection; not having an immediate bearing or application; not related in the natural way. Circuitous, not leading to aim or result by plainest course or method or obvious means, roundabout, not resulting directly from an act or cause but more or less remotely connected with or growing out of it."). For cases involving physical seizure of property see, e.,�., William L. Pereira Associates, Iran v. Islamic Republic t?firaii, Award No. 116-1-3 (19 Mar. 1984), reprinted in 5 Iran-U.S. C.T.R. 198, 227; Comynter Sciences Corp. v. Government of the Islamic Republic of Iran, et al., Award No. 221-65-1 (16 Apr. 1986), reprinted in 10 Iran-U.S. C.T.R. 269, 302-03; Sola Tiles. Inc. v. Government of the Islamic Republic of In"" Award No. 298-317-1 (22 Apr. 1987), reprinted in 14 Iran-U.S. C.T.R. 223, 33-34; Kenneth P. Yeaqer v. Islamic Republic of Irall, Award No. 324-10199-1 (2 Nov. 1987), reprinted in 17 Iran-U.S. C.T.R. 92, 102-04, 108.

18 Such an expropriation is "indirect" in the sense that, although the investor loses its property or the value of its investment, the host State does not obtain any corresponding economic benefit. On the other hand, for the host State to be liable for the effects of the measures, they have to be directly or proximately attributable to that State. See, e.g., International Technical Products Corp., et al. v. Government of the Islamic Republic of Iran, et al., Award No. 196-302-3 (28 Oct. 1985), reprinted in 9 Iran-U.S. C.T.R. 306 (holding that Bank Tejarat, a government- owned bank, acted in its commercial capacity and not as a state organ; consequently, its acts were not attributable to the Government of Iran). 19 See Tippets, Abbett, McCarrhy, Stratton v. TAms-ArF,4 Consulting Engineers of Iran, Award No. 141-7-2 (29 June 1984), reprinted in 6 Iran-U.S. C.T.R. 225-26. 20 Starrett Housing Corp. v. Government of the Islamic Republic of Iran, Award No. I rL 32-24-1 (19 Dec. 1983), reprinted in 4 Iran-U.S. C.T.R. 122, 154.

21Tippets,Abbett,McCarthy,Stratton,supra note 19, at 225-26. See also I'hillips Petroleum Co. Iran v. Islamic Republic ofirati, Award No. 425-39-2 (29 June 1989), reprillted ill 21 Iran-U.S. C.T.R. 79, 115 ("[AJ government's liability to compensate for expropriation of alien property does not depend on proof that the expropriation was intentional ....") C/. Sea Land Service, Inc. v. Islamic Republic of Iran, et al., Award No. 135-33-1 (22 June 1984), reprinted in 6 Iran-U.S. C.T.R. 149, 166 (holding that "finding of expropriation would require, at the very least, that the Tribunal be satisfied that there was deliberate governmental interference with the conduct of Sea-Land's operation, the effect of which was to deprive Sea-Land of the use and benefit of its investment."). See, e.`q., Sedrn, [tic., et al. v. National Iranian Oil Co., et al., Award No. ITL 55-129-3 (28 Oct. 1985), reprinted in 9 Iran-U.S. C.T.R. 248, 276-79; Phelps Do4qe Corp., et al. v. Islamic Republic of Iran, Award No. 217-99-2 (19 Mar. 1986), reprillted in 10 Iran-U.S. C.T.R. 121, 129-30; Foremost Tehrall, Inc., et al. v. Government of the Islamic Republic ofirati, et al., Award No. 220-37/231-1 (11 Apr. 1986), reprinted in 10 Iran-U.S. C.T.R. 228, 249-52; Thomas Earl Payne v. Government Islamic Republic of Iran, Award No. 245-335-2 (8 Aug. 1986), reprinted in 12 Iran-U.S. C.T.R. 3, 11; Harold Bimbaum v. Islamic Republic of Iran, Award No. 549-967-2 (6 July 1993), reprinted in 29 Iran-U.S. C.T.R. 260, 267-68. =3 See Matti Pcllonp55 & Malgosia Fitzmaurice, Taking of Property in the Practice of the Iran-United States Claims 'I'ribunal, 19 Neth. Y.B. Int'l L. 53, 60-72 (1988) (concluding that "in the majority ofcases ... the Tribunal has paid hardly any attention to the question oflegality.") =° See, whelps Dodge Corp., supra note 22, reprinted in 10 Iran-U.S. C.T.R. 121, 130. 25 See, e.g., Cnts Gas Transmission Co. v. Argentine Repuhlic, Autt/O1/8 (12 May 2005), paras. 252-65, available at http://www.worldbank.org/icsid/cases/CMS_Award.pdf; Metalclad v. United Mexican States, Aikii/(AF)/97/1 (30 Aug. 2000), para. 103, reprinted in 16 ICSID Rev. - Foreign Inv. L.J. at 179, 195 ("[EJxpropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host state, but also cover or incidental interference with the use of the property which has the effect of depriving the owner, in whole, or in significant part, of the use of the reasonably- to-be-expected economic benefit of the property, even if not necessarily to the obvious benefit of the Host state."); Compania del Desarrollo de Santa Elena, S.A. v. Costa Rica, AFZH/9fi/1 (17 Feb. 2000), para. 77, reprinted in IcsiD Rev. - Foreign Inv. L.J. 169, 194 (2000) ("[T]here is ample authority for the proposition that a property has been expropriated when the effect of the measure taken by the states has been to deprive the owner of title, possession, or access to the benefit and economic use of his property."); Biloune, et al. v. Ghana Investment Centre, et al., 95 I.L.R. 183, 207-10 (1993) ("The motivations for the actions and omissions of Ghanaian governmental authorities are not clear. But the Tribunal need not establish those motivations to come to a conclusion in the case. What is clear is that the conjunction of the stop work order, the demolition, the summons, the arrest, the detention, the requirement of filing assets declaration forms, and the deportation of Mr Biloune without possibility of re-entry had the effect of causing the irreparable cessation of work on the project.... In the view of the Tribunal, such prevention of MDCL from pursuing its approved project would constitute constructive expropriation of MDCL'S contractual rights in the project...."). ). 2(' Dolzer, supra note 1, at 86-90.

21 Along similar lines see, e.g., Brower & l3meschke, supra note 14, at 381 ("The imprecision in the use of the different articulations of the actions giving rise to responsibility may also be indicative of the fact that one State Party, Iran, may be more concerned with the articulation of the standard for that act, while the other party may be more concerned with the reality of the impact of the alleged taking and the calculation of damages therefrom."). 28 See Aldrich, supra note 14, at 178 (noting that the Tribunal did not look at the regulatory competence of the State to appoint temporary managers "because it doubted its ability to ascertain the intent of the Iranian Government, if indeed any clear intent existed, and because the laws pursuant to which the appointments were made were not truly custodial, in that the appointees were not accountable to the owners, and losses incurred during the administration would not be compensated.") However, in cases involving formal nationalizations, such as the nationalization of the insurance industry by virtue of the Law of Nationalization of Insurance Corporations of 25 June 1979, the Tribunal did consider and recognize the legality of such regulatory measures; see, e.g., American International Group, Inc., supra note 15, at 105 ("In the opinion of the Tribunal it cannot be held that the nationalization of Iran America was by itself unlawful, either under customary international law or under the Treaty ofAmity ..., as there is not sufficient evidence before the Tribunal to show that the nationalization was not carried out for a public purpose as part of a larger reform program, or was discriminatory."); It�A Corp., supra note 15, at 7-8 ("It has long been acknowledged that expropriations for a public purpose and subject to conditions provided for by law - notably that category which can be characterized as 'nationalizations' - are not per se unlawful. A lawful nationalization will, however, impose on the government concerned the obligation to pay compensation.") See also Amoco International Finance Corp. v. Government of the Republic of Iran, Partial Award, Partial Award No. 310-56-3 (14 July 1987), reprinted in 15 Iran- U.S. C.T.R. 189, 231-34.

EmarruelToov.UnitedStatesof America, Award No. 460-880-2 (29 Dec. 1989), reprinted in 23 Iran-U.S. C.T.R. 378. M Id. at 387-88 (citing 2 Restatement (Third) of the Foreign Relations law of the United States 712, comment g (1987); Ki7gele v. Polish State, 6 Ann. Dig. 69 (1931-32) (Upper Silesian Arb. Trib. 1930); Brewer, Moller f7 Co. Case (Gcr. v. Vcn.), 10 R. Int'l Arb. Awards 423 (1903). See also id. at 388 (dismissing claim for compensation for property sold at auction by the State of Arizona on grounds that "the disposition of abandoned property is commonly accepted as a lawful action within the police powers of States, again provided that such a disposition docs not discriminate against aliens."). Id. at 385-86 (citing Kennedy Case (U.S. v. Mex.), Opinions of Commissioners 289 (1927), 4 R. Int'l Arb. Awards 194 (1927); International Law Comm'n, Revised Draft on Responsibility of the State for injuries caused in its territory to the persons or property ofaliens, art. 7, para. 1, U.N. Doc. A/CN.4/34/Add. 1 (11 Dec. 1961), reprinted in [1961] 2 Y.B. Int'l L. Connn'n 46, and in F.V. Garcia-Amador, L. Sohn & R. Baxter, Recent Modification of the Law of State Responsihility for Injury to Aliens, 130 (1974); Almaguer Case (U.S. v. Mex.), Opinions of Commissioners 291 (1929), 4 R. Int'l Arb. Awards 523, 525 (1929). The Claimant's second claim, for the United States alleged failure to protect the Claimant's property, is perhaps not best characterized as an expropriation or taking claim, but as a claim for failure to secure adequate level of protection to foreign property. In modern multilateral and bilateral investment treaties investors arc often protected against such failures under the standard of full protection and security.

3-Sedco,Inc.,supra note 22. See also Arthur]. Fritz & Co. v. Cooperative Society of Construction Companies, Award No. 426-276-3 (30 June 1989), reprinted in 22 Iran-U.S. C.T.R. 170, 180-81. 33 Id. at 275 (footnote omitted). 3a Id. 35 See Starrett Housing Corp., supra note 22, at 156. 3s United Painting Co., Inc. v. Islamic Republic of Iran, Award No. 458-11286-3 (30 Dec. 1989), reprinted in 23 Iran-U.S. C.T.R. 351, 370-71 (citing General Dynamics Telephone Systems Center, Inc., et al. v. Islamic Republic of Iran, et al., Award No. 192-285-2, at 22 (4 Oct. 1985), reprinted in 9 Iran-U.S. C.T.R. 153, 164). Cf. W. Jack Buckamier v. Islamic Republic of Iran, et al. Award No. 528-941-3 (6 Mar. 1992), reprinted in 28 Iran-U.S. C.T.R. 307. As noted above (note 30), claims of this type are perhaps best characterized as claims for failure to provide adequate level of protection to foreign property rather than as expropriation or taking claims.

;� The well-known exception is Amoco International Finance Corp., supra note 28, where the Tribunal considered that "[t]he legal bases of the two concepts [i.e. lawful and unlawful expropriation] are totally different and, logically, the practical methods to be used in order to derive the amount due should also differ") Id. at 247. 3ri Phillips Petroleum, supra note 21, at 122. 39 One must also keep in mind that Phillips dealt with a de facto taking of the Claimant's contractual rights under the Joint Structure Agreement and not a property deprivation in the strict technical sense of this term - the Government of Iran, through its instrumentality, appropriated the Claimant's rights and thus benefited economically from the measure. Thus, the determination of legality of the measure was not necessary for the Tribunal to find the obligation to compensate; nor did the Claimant seek restitution.

40Seesupra note 25. 41 See, e.,q., Newcombc, Supra note 7, at 9-11. 1. 42 Methanex Corp. v. Unites States qfatiierica, Final Award of the Tribunal on Jurisdiction and Merits, Part IV - Chapter D, paras. 7 and 15, available at hCtp://www.invest:mcntclaims.com/oa2b.httTiI#m. 43 See, e�q., the debate on the OGEMID electronic discussion list in the fall of 2005. The approach adopted by the Methanex Tribunal has been recently followed by an ad Iroc Arbitral Tribunal acting under the UNCITRAL Rules; see Saluka Investments BV v. Czech Republic, Partial Award, 17 Mar. 2006, pars. 253-65 (citing Methanex and concluding that "in the present case, the Czech Republic has not 'crossed the line' [that separates valid regulatory activity from expropriation] and did not breach Article 5 of the Treaty [prohibiting expropriation without compensation], since the measures at issue can be justified as permissible regulatory actions.") Id. para. 265.

aa The determination of whether a taking has occurred - i.e. whether a property right or its commercial value has been transferred to the State - and whether such taking is unlawful under international law are separate determinations. Paulsson and Douglas speak of the "fusion fallacy" in this context. See Paulsson & Douglas, supra note 7, at 149-50. as See, e.g., Phillips Petroleum, supra note 21, at 121-22. The legal rationale of this approach is obvious: if the State intends to acquire something of value, and this intention is clearly expressed in a formal decree, compensation simply constitutes a "consideration" for an economic benefit the State recognizes it will receive. However, in case of an indirect expropriation in the technical sense of this term, i.e. a deprivation of a property right that does not result in an economic benefit to the State, this rationale does not apply since the State has, by definition, not acquired anything of value. In order to be under an obligation to compensate the foreign investor for its loss, the State must have committed an international wrong that engages its liability - hence the need for a legality analysis of the measure in question.

ih As noted in notes 31 and 36 supra, claims for compensation for property losses resulting from a government's failure to act are perhaps best characterized as claims for failure to comply with the international law standard of full protection and security ("due diligence") rather than as expropriation or taking claims.

For a recent award seeking to redefine the international law criteria for determining illegality see Tecnicas Medioambientales 1'eenred SA v. United Mexican States, Akb(AF)/00/2 (29 May 2003), at 42-48, available at http://www.investmentc)aitns.com/ua2b.hcml#t (assessing the legality of the measure concerned by reference to the standard of proportionality, apparently in an attempt to rely on the jurisprudence of the European Court of Human Rights). The jury is out as to whether this approach will be adopted by other tribunals. 11 Jacobellis v. Ohio, 378 U.S. 184 (1964), Mr Justice Stewart, concurring (discussing the definition of unprotected, or "obscene," speech under the First Amendment). Like most good ideas, I cannot claim that drawing a parallel between Justice Stewart's test and the definition of indirect expropriation is mine; see Fortier & Drymer, supra note 7.

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