Enforcing Arbitral Awards on Expropriation Under the Environmental Magnifying Glass

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Author: Aditya Sengupta*

Standard and Model Arbitration Clauses
International and Transnational Law

As global bodies mitigate the impact of the novel coronavirus, international financial investors in developing economies face an unprecedented situation led by a heightened risk of expropriations due to geopolitical interruptions. A recent example that highlights this risk was seen where the Government of Zambia was advised to destabilize the energy sector by expropriating assets belonging to industries because of the added pressure of the declining copper price due to the pandemic.

With a stark change in the status quo under Bilateral Investment Treaties (BITs), the rights of a foreign investor have been strained leading to stricter nationalizations of property either through direct or indirect measures.[1] Over the years, there has been a profound economic and environmental impact on the approach of states with respect to BITs due to these externalities, the most important being the physical and surrounding environment. In addressing this very point, states under their respective agreements reserve the right to expropriate or nationalize the property of a foreign party in the territory state either directly depriving the foreign investing state from the ownership and use of the said property, or indirectly by imposing strict regulatory measures which materially diminishes the use of such property and thereby for all purposes and means essentially diminishes the value of the property to the extent of it being dispensable and superfluous. The legality and debate about the former are fairly well settled, however it is these indirect measures of expropriation which attract distinguished and contrasting propositions.[2] The US Model Bilateral investment Treaty, Article 6 (1)[3]states the following –

Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”), except:

(a) for a public purpose;

(b) in a non-discriminatory manner;

(c) on payment of prompt, adequate, and effective compensation; and

(d) in accordance with due process of law and Article 5 [Minimum Standard of Treatment] (1) through (3).

This clause mirrors the principles under customary international law where in cases of expropriation, the state nationalizing the property has to necessarily compensate the party whose property is being nationalized. However, not all kinds of state measures will necessitate compensation and therefore be considered expropriation under International Law.[4] When a state directly deprives another party from their property in a manner that is deemed to be proportional, this amounts to expropriation and therefore the state liable to pay compensation. However, the same cannot be termed as proportional when a state uses strict control measures to regulate the use of said property. The state, therefore, is not liable to pay compensation as this is not deprivation of the said property in the strict sense of the term and therefore not expropriation per se due to the “absence of requisite severity of impact on the investment.”[5] Brownlie states that

[S]tate measures, prima facie a lawful exercise of powers of governments, may affect foreign interests considerably without amounting to expropriation. Thus, foreign assets and their use may be subjected to taxation, trade restrictions involving licenses and quotas, or measures of devaluation. While special facts may alter cases, in principle such measures are not unlawful and do not constitute expropriation[6]

In order to better understand the concept of expropriation with respect to the environment, a reference has to be made to cases determined by international tribunals. States are free to control the use of certain property in public interest by exercising laws as they deem necessary as stated in the case of Sporrong and Lönnroth v. Sweden.[7]

In Cia del Desarollo de Santa Elena SA v Republic of Costa Rica[8], an acquired property by Costa Rica was used for the purposes of building a national park. The ICSID tribunal was of the view that in light of “expropriatory environmental measures—no matter how laudable and beneficial to society as a whole—are, in this respect similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.”[9]

In the case of Tecnicas Medioambientales Tecmed S.A, vs. The United Mexican States[10], a contradictory view was taken to that of the Costa Rica case[11] wherein the contravention of rights under the BIT between Mexico and Spain was alleged to be an act of expropriation.  In this case the tribunal held the Mexican authorities act of non-renewal of license nullified the investment of the Spanish company and therefore amounted to expropriation among other violations of fair and equitable treatment obligations.

In cases of investments which are environmentally sound and protective in nature, cases such as Tecmed above, may set a dangerous precedent as they condone the act of compensation after expropriation when the foreign state is a victim of arbitrary action in the hands of the expropriating state. In this regard, a reference needs to be made to the plight of the innocent possessor of the property as was in the case of Toronto City vs Bernardo,[12] wherein due to the heightened costs of remedial environmental depreciation over the land value, the state authorities offered a sum total of one dollar as compensation. In the case of Thompson vs. Alberta,[13]  wherein the court had held that the Crown had failed to consider the cost incurred in the remediation of the wetlands before the investment on the land was done by the investing party, and upon expropriation, the compensation must include the cost incurred in remediation as well.

It is essential to also understand that when states on fair, reasonable grounds and with due diligence of the law expropriate due to environmental concerns in public interest, the quantum of compensation awarded should revisit the environmental costs that were borne by the state in expropriating the property and under the polluter pays principle, the foreign investing party should be liable to pay. The negation of the authority of international environmental customary laws and principles should be avoided at the behest of a state’s obligation to compensate.

[1] Jorge E. Vinuales, Environmental Measures and Expropriation Clauses in Foreign Investment and the Environment in International Law 293 (Cambridge University Press, 2012).

[2] Simon Baughen, Expropriation and Environment Regulation: The Lessons of NAFTA Chapter 11, 18 J. of Envtl. L. 207 (2006).

[3] 2012 U.S. Model Bilateral Investment Treaty.

[4] OECD, ‘Indirect Expropriation’ and the ‘Right to Regulate’ in International Investment Law, OECD Working Papers on International Investment, Sept. 2004, available at https://www.oecd.org/daf/inv/investment-policy/WP-2004_4.pdf.

[5] Simon Baughen, Expropriation and Environment Regulation: The Lessons of NAFTA Chapter 11, 18 J. of Envtl. L. 207, 213 (2006).

[6] Ian Brownlie, Principles of Public International LAW, 509, 6th Ed., 2003.

[7] Sporrong and Lönnroth v. Sweden, App. no 7152/75, Eur. Ct. H. R., (A/52) (1982).

[8] Compañia del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Award (Feb. 17, 200).

[9] Id. at ¶ 72.

[10] Tecnicas Medioambientales Tecmed S.A v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award (May 29, 2003).  

[11] Id. at 8.

[12] Toronto (City) v. Bernardo, 2004 CanLII 5760 (Can.Ont. S.C.).

[13] Thompson v. Alberta (Minister of Environment), 2006 ABQB 510 (Can.).

*Aditya Sengupta is in his final year of law school in School of Law, Christ University and is interested in International Environmental Law and the nuances of its doctrinal principles in different subject areas. The author would like to thank Dr. Rohit Roy for the lectures he delivered on International Environmental Law at School of Law, Christ University.