Expropriation laws and review processes

 

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1.5 Does the government maintain a policy of timely, adequate, and effective compensation for expropriation also consistent with its obligations under international law? What explicit and well-defined limits on the ability to expropriate has the government established? What independent channels exist for reviewing the exercise of this power or for contesting it?


Rationale

In certain circumstances, governments have a legitimate need and the right to take private property for public purposes. In environmental emergencies, public authorities may need, in the interest of public health, to resettle people whose property is located in irreparably contaminated areas. To develop infrastructure, such as roads and power stations, governments may need to acquire land to place these assets.

 

When a government expropriates property, compensation should be timely, adequate and effective. The right to fair compensation and due process is uncontested and is reflected in all international investment agreements. At the same time, some recent agreements provide that, except in rare circumstances, non-discriminatory regulatory actions that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, are not considered to constitute expropriations. Uncertainty about the enforceability of lawful rights and obligations should be avoided because it will restrain investment by raising the cost of capital, weakening firms’ competitiveness.

 

Related PFI questions:

The notion of periodic review is a core principle of the PFI and appears in Question 1.7Question 2.3Question 3.4, Question 6.8 and Question 10.8.

 

Key considerations

  • Defining the power to expropriate property
    Governments should ask themselves whether the public interest can be served by using public policy means other than expropriation. An example is giving government the right of first refusal on land transactions. If a government decides to expropriate land or other property, this decision ought to be motivated by a public purpose, observe due process of law, be non-discriminatory and guided by transparent rules that define the situations in which expropriations are justified and the process by which compensation is to be determined. This involves examining whether the country’s laws adhere to these principles and are in accordance with investment and investment-related treaties (e.g. investment guarantee treaties), which add to the predictability and legal enforceability of property rights against arbitrary expropriation.
     
  • Management of expropriation cases
    While best practices for handling the expropriation of private property may be built into the statute book, experience often reveals a gap with actual practices. The PFI user will need to examine the policy practices and constraints that may be acting to compromise the due process of law, including the implementation of timely, adequate and effective compensation for expropriation. In some expropriation cases, the modalities go beyond financial compensation, and these also need to be considered. Land taken to build a hydroelectric project, for example, will typically involve resettlement issues.
     
  • Contesting expropriation decisions
    In countries governed by the rule of law, the government is itself subject to the law. When an expropriation is contested, the final say on the legitimacy of the expropriation or the terms on which compensation is made should be handled by a court or other tribunal. The PFI user needs to consider these institutional arrangements. This involves examining: whether a court or tribunal – domestic and supranational – has the authority to review decisions regarding expropriation of property; the powers to give effect to its decisions; the restrictions, if any, on who has the right to contest an expropriation event; the modalities for filing an appeal or contesting an expropriation decision; and the technical capacity of the court or tribunal to hear contested expropriation cases.

 

Policy practices to scrutinise

Key issues for the PFI user in assessing a country’s expropriation laws and review processes include: evaluating the clarity and transparency of expropriation laws and modalities in terms of their ability to provide, when necessary, timely, adequate and effective compensation, their consistency with international norms and examining whether independent channels exist to review or contest expropriation decisions.

 

The following policy practices and criteria ought to be considered.

  • Defining the ability to expropriate private property. Areas that need to be considered include:
    • The laws that permit the confiscation of property and whether they expressly limit the conditions under which the government may expropriate private property for public purposes (e.g. nationalisation) and whether legal standards exist for determining when an expropriation event has occurred. Specific features of the laws permitting expropriation to examine include whether: i) they are non-discriminatory (e.g. in terms of nationality); ii) they establish the right to adequate compensation; iii) they allow for an appeals process; and iv) procedures exist for calculating compensation (e.g. specifying the factors and methods that can be used, such as purchase price, resale value, depreciation, goodwill etc.).
       
    • It is not feasible to list every circumstance in which the State may take private property in the public interest. Rather the PFI user should establish whether the authorities have made efforts to define the concept and to place boundaries on the scope of the public interest. Expropriation motivated on political grounds, for example, is not in the public interest.
       
    • Regulations that result in the de facto expropriation of property. Regulatory actions may constitute expropriation by denying an owner the ability to use or sell property or otherwise heavily encumber its use, thus reducing its economic value. Many government decisions can affect the value of private property, and it is clearly not the role of the PFI user to make judgments on whether the government is exercising its regulatory powers or acting to seize indirectly property. Rather, the PFI user needs to assess whether efforts have been made by the government to inform its agencies and provide guidance on how to distinguish practices that may constitute indirect expropriation. This might involve, for instance, collecting, synthesising and communicating the reasoned decisions of case histories from conciliation commissions and arbitral tribunals. For events that were determined to be cases of indirect expropriation, the PFI user should examine whether the property owner was compensated, following the same modalities as for direct expropriation.
       
  • Implementation of expropriation laws and practices. The PFI user should examine the policy practices and constraints that may compromise the implementation of timely, adequate and effective compensation for expropriation. The factors and criteria to consider are:
    • The median time taken to effect compensation following an expropriation event. There is no golden rule on the length of time taken, as it depends on many factors (e.g. complexity of the case). Comparisons with countries with similar cases can provide a benchmark.
       
    • The techniques used to calculate the level of compensation. One way to assess whether compensation is adequate is to ask how close the amount paid is to the current market value of the expropriated property. This involves examining the methods used to determine market value. In straightforward cases, such as land, there are usually prevailing market prices, but for unique or rarely traded assets, there is no readily available market price. In these cases the PFI user needs to assess efforts by the government to avoid arbitrary procedures, looking at what valuation techniques are used (e.g. book value), which factors are taken into consideration (e.g. value of intangible assets, depreciation, damage to property), the legal standards applied; and what practices are adopted (e.g. use of third-party expert valuations, payment of interest).
       
    • The modalities of compensation payment. Beyond the issue of prompt payment of compensation is the question of how compensation is paid. The PFI user needs to assess whether payments are fully realisable (e.g. paid in cash), and freely transferable (e.g. convertible into another currency, or payable in a hard currency). In some instances, non-pecuniary settlement is offered (e.g. resettling displaced persons). In these cases, the modalities to examine include: use of dialogue with those directly concerned; proximity to previous location; similar amenity value; and comparable quality of the substitute offered in compensation.
       
    • Analyses of case histories of expropriation events brought to commissions or arbitral tribunals and consultation with stakeholders to gain their insights and experiences with the process. This will also help the PFI user to ascertain whether there are signs of potential problems (e.g. disproportionate number of cases in a specific sector, or involving foreign enterprises), shed light on the time taken to effect compensation, the actual methods used to calculate compensation, and on the manner of expropriation (e.g. arbitrary or guided by due process).
  • Independent channels to review or contest expropriation decisions. The PFI user needs to examine the mechanisms available and processes for contesting expropriation decisions. The factors to consider are:
    • Whether the appeals body is independent from the agency ordering the expropriation and has the power to review and if necessary overturn government agency decisions regarding expropriation and compensation to owners of expropriated property; the grounds on which a decision can be contested are clear and transparent (e.g. documented procedural rules); whether national laws recognise alternative dispute resolution systems (e.g. foreign-based conciliation commissions and arbitral tribunals) and honour and enforce their decisions.
       
    • The technical capacity of the court or tribunal to review expropriation events. On this point, the policy practices to scrutinise are discussed in detail in Question 1.4.

 

Further resources and case studies

  • Lex Mercatoria www.lexmercatoria.org (see Question 1.8).
     
  • The International Chamber of Commerce (ICC) Commission on Arbitration is a forum for pooling ideas on issues relating to international arbitration and other forms of dispute resolution. The website offers information on their work, arbitration rules and guidelines on the ways in which the ICC Rules of Arbitration can most effectively be used.
     
  • An OECD paper on “’Indirect Expropriation’ and the ‘Right to Regulate’ in International Investment Law” surveys information on jurisprudence, state practice and related literature. It presents the issues at stake and describes the basic concepts of the obligation to compensate for indirect expropriation; reviews whether and how legal instruments and other texts articulate the difference between indirect expropriation and the right of the governments to regulate without compensation; and attempts to identify criteria which emerge from jurisprudence and state practice for determining whether an indirect expropriation has occurred.
     
  • The Investment Treaty Forum at the British Institute of International and Comparative Law is a centre for discussion and research in public international law and international commercial arbitration. The Forum facilitates debate among lawyers, senior business managers, policy advisers, academics, government officials and other specialist practitioners. It also encourages dialogue with state representatives. Part of this work involves reviewing each of the arbitral awards where the issue of damages was discussed. The thrust of each case summary is on issues related to the award of monetary compensation. These case study summaries are available to members of the Forum.
     
  • The Political Risk Insurance Center provides a searchable database of web-based documents on political risk environments; on legal issues related to arbitration, mediation and other investment dispute resolution and prevention mechanisms; research findings and analyses of political risk issues and their relationship to foreign direct investment.

 

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