LEGAL REMEDIES AVAILABLE TO AND CONSIDERATIONS FOR FOREIGN INVESTORS WHEN GOVERNMENTAL EXPROPRIATION OR "CREEPING NATIONALIZATION" OCCURS

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development and Investment
(Apr 2009)
CHAPTER 6B
LEGAL REMEDIES AVAILABLE TO AND CONSIDERATIONS FOR FOREIGN INVESTORS WHEN GOVERNMENTAL EXPROPRIATION OR "CREEPING NATIONALIZATION" OCCURS
John D. Fognani, Esq.
Kendall R. McLaughlin, Esq.
Fognani & Faught
Denver

John D. Fognani has been involved in the natural resources industry for over 30 years as a legal practitioner and more recently as counsel to Ivanhoe Mines Ltd. with regard to projects abroad and more particularly the company's Oyu Tolgoi Project in Mongolia. The emphasis of John's experience has been in the areas of project development and project finance, and compliance with local, state, federal and international laws and requirements applicable to mining and oil and gas development. John has extensive experience pertaining to international law and financing, particularly relating to mineral and energy development. He has extensive experience negotiating and preparing exploration agreements; international joint venture and consortium agreements; stability agreements and tax analyses; pre-feasibility and feasibility studies; environmental impact assessments to ensure compliance with national and international requirements; financial instruments; construction and engineering contracts and project development documents. During his professional career, John has been involved in litigating a number of highly visible, complex environmental and natural resources matters, including the following cases: State of Colorado v. Asarco Incorporated (natural resource damage action); United States v. Rockwell Int'l (defense involving criminal and environmental investigation and liability); STOP v. Marathon Ashland Pipeline Co. (construction of 149 mile Ohio pipeline); In Re Redlands (California toxic tort suit); and Wilson v. Amoco Corp. (RCRA citizen suit); AMC v. EPA (D.C. Cir. 1987)(challenging EPA's regulatory definition of solid waste and its application to the mining industry). John is listed in BEST LAWYERS IN AMERICA under the following categories: Natural Resources Law; Environmental Law; Mining Law; Oil and Gas Law; and Energy Law; the WHO'S WHO OF AMERICAN LAWYERS; THE INTERNATIONAL WHO'S WHO OF BUSINESS LAWYERS BEST LAWYERS: ENVIRONMENTAL LAW; and the COLORADO SUPER LAWYERS

I. Introduction

The generally accepted rule is that a sovereign nation is allowed to nationalize or expropriate property from within its borders when doing so is in the public interest, on a non-discriminatory basis, with due process of law and with fair and just compensation. Under international law, for there to be an expropriation it is necessary to establish governmental interference with a property or economic right or interest. Proceedings of the Ninety-Fifth Annual Meeting of the American Society of International Law, 95 Am. Soc'y Int'l L. Proc. 196 (2001). Property in international law is defined broadly and refers to both tangible and intangible property. LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, para. 187 (2006); see also Jon A. Stanley, Keeping Big Brother Out of Our Backyard: Regulatory Takings as Defined in International Law and Compared to American Fifth Amendment Jurisprudence, 15 Emory Int'l L. Rev. 349, 357 (2001). A particularly sensitive issue involves a sovereign nation's assertion of rights over its natural resources and the exploitation of the same.

There are generally two types of expropriation (both of which may be lawful or unlawful), direct expropriation and regulatory expropriation (also known as "creeping expropriation" or "indirect expropriation"). Formally a direct expropriation means a "forcible appropriation by the State of the tangible or intangible property of individuals by means of administrative or legislative action," LG&E Energy Corp., supra, but the term "also covers a number of situations defined as de facto expropriation, where such actions or laws transfer assets to third parties different from the expropriating State or where such laws or actions deprive persons of their ownership over such assets, without allocating such assets to third parties or to the Government." Tecnicas Medioambientales TECMED S.A. v. The United Mexican States, ICSID Case No. ARB(AF)/00/2, para. 113 (2003). Such expropriation occurs when a party is "radically deprived of the economical use and enjoyment of its investments, as if the rights related thereto... had ceased to exist." Id. at para. 115.

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Regulatory or creeping expropriation, on the other hand, is an action or series of actions by a party that may take place over a long period of time having an effect equivalent to direct expropriation without formal transfer of title or outright seizure. Surya P. Subedi, The Challenge of Reconciling the Competing Principles Within the Law of Foreign Investment with Special Reference to the Recent Trend in the Interpretation of the Term `Expropriation,' 40 Int'l L. 121, 135 (2006). Whether or not there has been a compensable act of indirect expropriation is a fact-based inquiry. Naveen Gurudevan, An Evaluation of Current Legitimacy-Based Objections to NAFTA's Chapter 11 Investment Dispute Resolution Process, 6 San Diego Int'l L. J. 399, 428 (2005).

Due to the diversity of the institutions that serve as venues for competing claims of international actors, and the few international cases dealing specifically with regulatory takings, there is considerable controversy over what type of behavior amounts to expropriatory action under international law, particularly in circumstances where a form of creeping expropriation has occurred. This paper provides some guidance to the practitioner in determining the point at which the normal exercise of government regulatory powers becomes compensable regulatory expropriation, as well as the predominant legal remedies available to foreign investors in such circumstances. Additionally, this paper addresses the compensation available to foreign investors in the event of a regulatory expropriation and the compensation available upon a breach of any international agreements or treaties under international law. Additional legal remedies that may be available to aggrieved parties in courts of the United States are beyond the scope of this paper, though any such remedies must be evaluated in real world circumstances where an unauthorized taking has occurred.

II. Determining Whether Governmental Regulation Amounts to Expropriation

Foreign investors, having invested capital in a host state, risk having the host state subsequently and unexpectedly enact legislation or promulgate regulations to their detriment, ultimately decreasing the value of their investment, compromising their ability to develop a project or making it impossible to proceed with an investment. Michael G. Parisi, Moving Toward Transparency? An Examination of Regulatory Takings in International Law, 19 Emory Int'l L. Rev. 383, 399 (2005). In order to attract capital from abroad, "[n]ations have codified protection against expropriation in various forms of international agreements." J. Martin Wagner, Nature Beyond the Nation State Symposium: International Investment, Expropriation and Environmental Protection, 29 Golden Gate U. L. Rev. 465, 472 (1999). These international agreements, which are treated as binding and enforceable contracts,¹ are relied on by foreign investors to protect their investments by providing them with an opportunity to challenge host states in an international forum with an independent arbiter when their investment has been perceptibly jeopardized. See Parisi, supra. Foreign investors are protected primarily by international treaties and agreements, rather than by customary international law alone.

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Jeswald W. Salacuse and Nicholas P. Sullivan, Do BITs Really Work?: An Evaluation of Bilateral Investment Treaties and Their Grand Bargain, 46 Harv. Int'l L.J. 67, 70 (2005). Additionally, in order to attract foreign investment most countries provide local remedies in the event of an expropriation and a process to accomplish the same with just compensation. Section III of this paper provides a list and description of some of these international remedies, in the form of treaties and agreements, that protect investors against direct or indirect expropriation.

It is not unheard of but relatively unusual for a host state in the modern era to attempt a brazen taking of property or concessions held for investment or development by a foreign investor. The more recent expropriation claims typically brought by foreign investors are those asserting a form of regulatory or legislative expropriation. Parisi, supra at 389. Tribunals in determining whether government actions have amounted to an indirect expropriation use customary international law. Justin R. Marlles, Public Purpose, Private Losses: Regulatory Expropriation and Environmental Regulation in International Investment Law, 16 J. Transnat'l L. & Pol'y 275, 296-297 (2007). Whether particular events fall within the definition of an indirect expropriation is not always clear and can only be determined on the basis of the unique facts of each particular case, "the way the evidence is presented, and the legal bases pleaded." Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/0, para. 20.29 (2003). Bilateral Investment Treaties ("BITs") and the provisions of the North American Free Trade Agreement ("NAFTA") fail to define a test for determining when a regulatory measure becomes an illegal compensable taking. Parisi, supra at 402. Without a foreign investor being subject to a substantial amount of harm, an international tribunal will not easily come to a finding of expropriation. Barry Appleton, Regulatory Takings: The International Law Perspective, 11 N.Y.U. Envtl. L.J. 35, 48 (2002).

a. Factors tribunals consider when determining whether governmental action has amounted to a regulatory

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