Report No. 260

B. Article 5. Expropriation

(i) Analysis and comment:

3.2.1 The 2015 draft Model BIT on expropriation provides that an indirect expropriation requires evidence that there has been permanent and complete, or near complete, deprivation of the value of the foreign investment and of the investor's right of management and control over investment (Article 5(2)(i) and (ii)).

Thus, the treaty not only provides for the 'substantial deprivation'-test to determine indirect expropriation, but also requires in Articles 5.2 (i) and (ii) that this deprivation should be both economic and legal. Chemtura Corp. v Government of Canada, UNCITRAL, Award, 2 August 2010, para 247.

Arbitration tribunals have used different approaches to answer the question of whether 'substantial deprivation' should be understood in a legal sense or an economic sense. Some tribunals favour the so-called 'legal approach' to determine substantial deprivation where 'control over investment' is the key indicator to determine indirect expropriation. Enron Corp. v Argentina, ICSID Case No ARB/01/3, Award, 22 May 2007, para 245; CMS v Argentina, para 263. Other arbitral tribunals, by contrast, have focused on the economic approach emphasising the substantial deprivation of the value of the investment.

Telenor Mobile Communications AS v The Republic of Hungary, ICSID Case No ARB/04/15, Award, 13 September 2006, para 64; Parkerings Compagniet v Republic of Lithuania, ICSID Case No ARB/05/8, Award, 11 September 2007, para 455. However, requiring both legal and economic deprivation might be problematic from the perspective of foreign investor.

For example, in a situation where there is substantial economic deprivation, separately proving legal deprivation will be difficult. Legal deprivation must be presumed. Similarly, if there is legal deprivation, economic deprivation must be presumed. Thus, it is suggested that the word 'and' in Article 5.2 (i) should be replaced with the word 'or'.

3.2.2 Another related problem - the question of a 'substantial deprivation' of which 'investment' - has not been answered. Should it be the 'investment as a whole' or will 'substantial deprivation' of even a 'single asset' owned or controlled by the foreign investor suffice to amount to expropriation? This is important because foreign investment (say a manufacturing company) usually constitutes a bundle of individual assets (licenses, permits, intellectual property rights etc) with each such investment being capable of expropriation.

Arbitral tribunals have followed different approaches - some have focused on an 'individual asset'-approach, ruling that 'substantial deprivation' of even an 'individual asset' could constitute expropriation Eureko BV v Republic of Poland, Ad Hoc Arbitration, Partial Award, 19 August 2005, paras 239-42; En Cana Corporation v The Republic of Ecuador, LCIA Case No UN3481, UNCITRAL, Final Award, 3 February 2006, paras 183, 188, 189 and 193; See Santiago Montt, State Liability in Investment Treaty Arbitration (Hart 2009) 269; Ursula Kriebaum, 'Partial Expropriation', Journal of World Investment and Trade, 2007, volume 8, p 69. (which will limit State's regulatory power), whereas some have followed the 'investment as a whole' approach' Telenor Mobile Communications AS v The Republic of Hungary, ICSID Case No ARB/04/15, Award, 13 September 2006, para 67. (which provides greater regulatory latitude to the Host State).

In the present formulation, tribunals are free to adopt the 'investment as a whole'-approach or an 'individual asset'-approach.

3.2.3 Further, the balance struck between investment protection and regulatory space in Articles 5.2 (i) and (ii) is tilted in favour of the Host State by article 5.2 (iii). This Article provides that determination of an indirect expropriation also requires an appropriation of the investment by the Host State.

This requires a transfer of complete or near complete value of the investment to the Host State or any agency or instrumentality of the Host State. In other words, even if the entire investment is 'substantially or totally deprived' in both a legal and an economic sense it will not constitute an indirect expropriation if the value of investment is not transferred to the Host State. Thus, it is suggested that Article 5.2 (iii) be deleted.