International Investment Law Symposium LLM Perspectives Online Publications

Non-Action as an Indirect Expropriation

This paper is based on the final paper of the class “International Investment Law” taught by Professor William W. Burke-White in the 2016 spring semester. The author would like to thank Professor Burke-White and the other class participants for their invaluable instructions, guidance and comments. All errors and omissions are the author’s alone. The author can be reached at yuraychang@hotmail.com.

I. Introduction

Indirect expropriation, including creeping expropriation and consequential expropriation, is a relatively vague concept, and there is no clear applicable rule under customary international law addressing the relationship between these concepts. This paper illustrates the intricacies of these concepts in order to clarify the relationship between them, and it introduces a standard to distinguish creeping expropriation from consequential expropriation. It also depicts the merits of the standard that the Claimant can relieve the burden of proof and shift the burden to the Respondent.

This purpose of this paper is to examine whether a government’s “non-actions” gave rise to an indirect expropriation of the properties of investors. Part II analyzes the concepts of indirect expropriation, creeping expropriation and consequential expropriation, especially in regard to the host State’s intention, causal relationship and action (including non-action). Here, a standard for appropriate identification or distinction of such measures is introduced. Part III then discusses the use of burden shifting frameworks in the practice of international arbitration law, and Part IV concludes this paper.

II. The Concepts and Elements of Indirect Expropriation

A. Indirect Expropriation

Besides the benefits expected for both foreign investors and host States, the other vital purpose of Bilateral Investment Treaties (“BITs”) is to shield foreign investors from illegal governmental actions, especially any forms of expropriations. Recognizing the need to attract foreign private capital and technologies, and wishing to project a climate of foreign investment safety, the majority of capital-importing host States attempt to avoid the international reputation and investment-dampening stigma of frequently expropriating their foreign investments. Even when States engage in expropriations, many States prefer to implement indirect expropriations, as opposed to an overt expropriation by formal decree.01Christoph Schreuer, The Concept of Expropriation under the ECT and other Investment Protection Treaties 9 (2005), available at http://www.univie.ac.at/intlaw/pdf/csunpublpaper_3.pdf. The United Nations Conference on Trade and Development (UNCTAD), tasked with defining the term “indirect expropriation,” simply adopted a definition in opposition to direct expropriation. The UNCTAD definition stated that indirect expropriation could occur “where a measure that does not directly take property has the same impact by depriving the owner of the substantial benefits of the property.”02UNCTAD, Investor-State Disputes Arising From Investment Treaties: A Review 41 (2005).

Some negotiators have sought a more-detailed definition of indirect expropriation. For example, the Dominican Republic-Central America Free Trade Agreement states that indirect expropriation can occur where an action or series of actions by a party has an effect equivalent to direct expropriation, without the formal transfer of title or outright seizure.03Dominican Republic-Central America Free Trade Agreement, 19 U.S.C. § 4001 (2005), available at http://www.ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta/final-text. Note that the approach taken in other similar treaties (e.g., the Australia-Chile Free Trade Agreement (FTA) (2006), the Japan-Philippines FTA (2008), the Egypt-Germany BIT (2005), the Mexico-United Kingdom BIT (2006) and the Japan-Lao People’s Democratic Republic BIT (2008)) was to clearly define what constitutes a direct and indirect expropriation, as well as to set out specific criteria in order to find that an indirect taking has taken place. However, when scholars refer to “indirect expropriations,” their references are varied and interchangeable, and the term is often haphazardly cited as “regulatory expropriation,” “constructive expropriation,” “consequential expropriation,” “disguised expropriation,” “de facto expropriation,” and “creeping expropriation.”04William Reisman & Robert Sloane, Indirect Expropriation and its Valuation in the BIT Generation, 74 Brit. Y.B. Int’l L. 119 (2004); see also Burns Weston, Constructive Takings Under International Law: A Modest and Foray into the Problem of Creeping Expropriation, 16 Va. J. Int’l L. 103, 106 (1975); Mustafa Erkan, International Energy Investment Law: Stability Through Contractual Clauses 63–64 (2010); Rudolf Dolzer & Margrete Stevens, Bilateral Investment Treaties 99 (1995). A similar understanding is echoed in Paragraph 1, Article 1110 of NAFTA, which indicates that indirect expropriation encompasses “measure[s] tantamount to nationalization or expropriation of such an investment.”05North American Free Trade Agreement, art. 1110 U.S.-Can.- Mex., Dec. 17, 1992, 32 I.L.M. 289 (1993). Here, the word “tantamount” essentially means “equivalent,” as both words require that a tribunal look into the substance of what has occurred, and not only to form, technical, or facial considerations.06Schreuer, supra note 2. The below evaluations thus center on the notions of indirect expropriation in the narrower sense of creeping (or “regulatory”) expropriation and consequential expropriation.

Narrowly speaking, indirect expropriation is usually defined in opposite contrast to a direct expropriation, and is an established concept in customary international law. The concept traces back to an arbitral tribunal’s award rendered by special agreement between Norway and the United States in the 1922 case of Norwegian Shipowners Claims,07Norwegian Shipowners’ Claims (Nor. v. U.S.), 1 R.I.A.A. 307 (Perm. Ct. Arb. 1992). as well as the Permanent Court of International Justice’s judgment between Germany and Poland in the 1926 case of Certain German Interests in Polish Upper Silesia Case.08Certain German Interests in Polish Upper Silesia (Germ. v. Pol.), 1926 P.C.I.J. (ser. A) No. 7 (May 25). In the 1968 British Yearbook of International Law, G.C. Christie concluded that these two cases built up the two basic pillars of “indirect expropriation.” The first pillar is that “a State may expropriate property, where it interferes with it, even though the State expressly disclaims any such intention.” The second pillar is that “even though a State may not purport to interfere with rights to property, it may, by its actions, render those rights so useless that it will be deemed to have expropriated them.”09Reisman & Sloane, supra note 5, at 119–20; see also George Christie, What Constitutes a Taking Under International Law, 38 Brit. Y.B. Int’l L. 311 (1962). In order to determine whether indirect expropriation has occurred, the action must be examined based on these criteria, as outlined below.

First, the substantial effects or impacts of the State action should be measured. This method mainly refers to more “objective” measurements, often interpreted with a focus on the specific property rights infringed by the State action. Some commentators said that the decisive element in an indirect expropriation is the substantial loss of control or economic value of a foreign investment without physical taking.10Ian Brownlie, Principles of Public International Law 534 (1966). For example, in the 1984 case of Tippets v. Tams-Affa Consulting Eng’rs, the appointment of a new manager by the Iranian government constituted expropriation. The tribunal emphasized the degree of interference with Tippet’s property rights, and indicated that “the intention of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact.”11Tippetts v. TAMS-AFFA Consulting Engineers of Iran, 6 Iran-U.S. Cl. Trib. Rep. 219, 225–26 (1984). The 2000 ICSID case Metalclad Corporation v. The United Mexican States indicated that indirect expropriation includes covert or incidental interference with deprivation of the use of owner’s property in whole or in significant part, and of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.12Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶ 103 (Aug. 30, 2000). Following this case, interference should substantially deprive the owner’s property or reasonably-to-be-expected economic benefit of property in whole or in significant part.13LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, ¶ 60 (Oct. 3, 2006) (applying the same substantial deprivation approach in another case). ICSID made another decision in 2000, Compañia del Desarrollo de Santa Elena, S.A. v. Costa Rica, finding “ample authority for the proposition that property has been expropriated when the effect of the measures taken by the state has been to deprive the owner of title, possession or access to the benefit and economic use of his property.”14Compañia del Desarrollo de Santa Elena, S.A. v Costa Rica, ICSID Case No. ARB/96/1, Final Award, ¶ 77 (Feb. 17, 2000). Similar to Metalclad, the panel’s analysis was concentrated on the effect of the State measure. Similarly, the UNCITRAL panel in the 2007 case Pope & Talbot Inc. v. The Government of Canada stated their disbelief “that the phrase ‘measure tantamount to nationalization or expropriation’ in Article 1110 broadens the ordinary concept of expropriation under international law to require compensation for measures affecting property interests without regard to the magnitude or severity of that effect.”15Pope & Talbot Inc. v. Government of Canada, UNCITRAL, Interim Award, ¶ 96 (Jun. 26, 2000).

Second, the period of deprivation should be considered. The arbitral award in the 2000 case of S.D. Myers, Inc. v. Government of Canada indicated that, to constitute expropriation, the period of deprivation should be permanent, or at least a substantial period of time.16S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award, ¶ 283 (Nov. 13, 2000). In 2007, the BG Group v. The Republic of Argentina tribunal had exercised the same reasoning to rule that the State’s action did not constitute an expropriation. To be precise, besides the reasoning of substantial deprivation,17BG Group v. The Republic of Argentina, UNCITRAL, Final Award, ¶ 271 (Dec. 24, 2007). the tribunal perceived that Argentina’s action was not permanent and did not last for a substantial period of time, thus the action could not be deemed to be an expropriation.18Id. ¶ 270.

Third, the intention of the acting host State should be considered (the “purpose doctrine”). In Sea-Land Sev., Inc v. Iran, the tribunal determined that “a 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 operations, the effect of which was to deprive Sea-Land of the use and benefit of its investment,” before ultimately concluding that “nothing had been demonstrated which might have amounted to an intentional course of conduct directed against Sea-Land.”19Sea-Land Service Inc. v. Iran, 6 Iran-U.S. Cl. Trib. Rep. 149, 166 (1984). In the same year, the Iran-U.S. Claims Tribunal decided Tippets v. Tams-Affa Consulting Eng’rs. The Tippets tribunal compared the action’s objective impact to the State’s subjective intention in acting, ruling that “the effect of the measure/the reality of their impact” is much more important than “the intent of the government concerning expropriation.”20Tippetts v. TAMS-AFFA Consulting Engineers of Iran, supra note 12, at 225–26. This demonstrates that the host State’s intentions were considered as part of the expropriation determination. The tribunal in S.D. Myers, Inc. v. Government of Canada strongly emphasized the role of the host State’s intention, stating that “[a] tribunal should not be deterred by technical or facial considerations from reaching a conclusion that an expropriation or conduct tantamount to an expropriation has occurred. It must look at the real interests involved and the purpose and effect of the government measure.”21S.D. Myers, Inc. v. Government of Canada, supra note 17, ¶ 285.

Nevertheless, the question of whether the intention of a host State is a necessary predicate of indirect expropriation, or merely one of the possible characteristics that must be demonstrated, remains unresolved. One U.N. study attempts to provide a solution, noting that indirect expropriation occurs when a government takes an action that substantially impairs the value of an investment, without necessarily assuming ownership of the investment. Accordingly, indirect expropriation may occur even though the host State disavows any intent to expropriate the investment, a point on which scholars concur almost without exception.22Reisman & Sloane, supra note 5, at 121.

This leads to another question: Could a host States’ “non-action” constitute a kind of indirect expropriation? In Phillips Petroleum Co. v. Iran, the panel pointed out that “a series of concrete actions” can form a deprivation of property, and refrained from excluding the possibility that non-action could form a type of indirect expropriation.23Phillips Petroleum Co. Iran v. Iran et al., 21 Iran-U.S. Cl. Trib. Rep. 79, at 115–16 (1989). The Phillips Petroleum decision infers that a State may accomplish expropriation in ways other than outright action. In recent years, tribunals have increasingly accepted that indirect expropriation should be examined in a consequential and substantial way, rather than any examination bound in strict formalism. A consequential, substantial examination understands that whether the action or inaction occurs due to malfeasance, misfeasance, nonfeasance, or some combination of the three, the principal factor remains the effect of the State conduct on foreign property rights or foreign control over an investment.24Reisman & Sloane, supra note 5, at 121. As noted above, it is generally acknowledged that a variety of measures are susceptible to lead to indirect expropriation, and each case is therefore likely to be decided on the basis of its attending circumstances.25Dolzer & Stevens, supra note 5, at 100.

B. Creeping Expropriation and Regulatory Expropriation

Creeping Expropriation
Creeping expropriation, a form of indirect expropriation,26Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, ¶ 20.22 (Sep. 16, 2003). is comprised of a number of inseparate elements,27Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/98/2, Dissenting Opinion (of Keith Highet), ¶ 17, (May 8, 2000). and is defined as “a slow and incremental encroachment on one or more of the ownership rights of a foreign investor that diminishes the value of its investment.”28Noah Rubins & Stephan Kinsella, International Investment, Political Risk and Dispute Resolution: A Practitioner’s Guide, 207 (2005). Several international documents refer to creeping expropriation, including the Draft Convention on the Protection of Foreign Property29O.E.C.D. Draft Convention on the Protection of Foreign Property, Text with Notes and Comments, 7 I.L.M. 118 (1968). and the Restatement (Third) of the Foreign Relations Law of the United States.30Restatement (Third) of the Foreign Relations Law of the United States Vol. II § 712 (1987). According to UNCTAD, creeping expropriation is “the use of a series of measures in order to achieve a deprivation of the economic value of the investment,” and as such, “no individual measure in itself would amount to an expropriation.”31UNCTAD, supra note 3, at 42. The series of measures vary, and can include taxation, regulation, denial of process, delay and non-performance, and other forms of governmental malfeasance, misfeasance, and nonfeasance.32Dolzer & Stevens, supra note 5, at 100. Commentators generally agree that the closest case to true creeping expropriation is the Somalia government’s assorted actions or non-actions, including occasional arrests of key employees and blocking access to the physical plant, against a foreign-owned shellfish processing facility.33Reisman & Sloane, supra note 5, at 123; see also Vance R. Koven, Expropriation and the “Jurisprudence” of OPIC, 22 Harv. J. Int’l L. 269, 291 (1981). Another specific characteristic of creeping expropriation arose in the international law practice as well. Generation Ukraine, Inc. v. Ukraine explored the concept of creeping expropriation and stated that, “[c]reeping expropriation is a form of indirect expropriation with a distinctive temporal quality in the sense that it encapsulates the situation whereby a series of acts attributable to the State over a period of time culminate in the expropriatory taking of such property.”34Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, ¶ 20.22 (Sep. 16, 2003).

One concern within the scope of creeping expropriation is the host State’s intention when it acts or fails to act, as this is often very difficult to discern with certainty. In theory, the intentions of lawmakers or decision makers can be determined through aggregation of each separate event; however, in practice, the actions/non-actions forming creeping expropriation are extremely difficult, if not impossible, to discern. One solution might be to infer intention from the underlying facts: If all the facts demonstrate that the host State’s policy was to deprive the benefits of investors, then an underlying intention can be reasonably construed.35Schreuer, supra note 2, at 35. Discovering the host State’s intention, assuming such a clear intention exists, is therefore highly arduous without applying the retrospective method of analysis to the State’s actions, as well as to the underlying facts.36Admittedly, some commentators indicate that an intention to expropriate is not essential and the purpose that serves the public interest is not decisive. However, in this paper, it is considered that a host State’s intention is always an essence for contemplation: In creeping expropriation, it is a retrospective method to determine the existence of intention, and in consequential expropriation, the existence of intention is transferred to a host State’s obligation for offering a favorable investment condition. By the gradual and cumulative nature, the moment of interference is also problematic to specify since the actions or non-actions of creeping expropriation are a series of governmental movements or policies. Creeping expropriation includes a series of actions in different ways. For example, a creeping expropriation can still benefit foreign investors in the short term. Judge Brower noted that “it is difficult to envision a de facto or ‘creeping’ expropriation ever being lawful, for the absence of a declared intention to expropriation almost certainly implies that no contemporaneous provision for compensation has been made.”37Sedco, Inc. v. Nat’l Ir. Oil Co., 10 Iran-U.S. Cl. Trib. Rep. 180, 206 n. 42 (1986) (Brower, Arb., concurring).

Regulatory Expropriation
Besides creeping expropriation, there is another category of indirect expropriation: regulatory expropriation. UNCTAD’s report defines regulatory expropriation as a measure “taken for regulatory purposes but [which] has an impact on the economic value of the asset owned by the foreign investor sufficient to be deemed an expropriation.”38UNCTAD, supra note 3, at 42. A government which elects not to directly exploit foreign investors’ properties may nevertheless disrupt investors’ expected profits by enacting or amending laws or regulations. The subjects of this regulatory expropriation include taxes, the environment, public health, and human rights.39Mustafa Erkan, International Energy Investment Law: Stability Through Contractual Clauses, 63–64 (2010); Schreuer, supra note 2, at 28 (discussing the two criteria for establishing the threshold between a simple regulation and a regulatory expropriation: The first criterion is a quantitative test that looks into the severity of the effect on the investment. The other is a motive-oriented test that would look for the existence of an intention to expropriation). Some commentators say that an unyielding line cannot be drawn between the concepts of creeping expropriation and regulatory expropriation, due to the nature of its complexity and elusiveness. However, in truth, regulatory expropriation is only a subcategory of creeping expropriation, because the nature of creeping expropriation is comprised of a number of inseparate elements—of which regulatory actions comprise only one example.40Waste Management, Inc. v. United Mexican States, supra note 28, ¶ 17. In Suez v. Argentina, the tribunal analyzed whether the measures adopted by Argentina during the 2000–2002 economic crisis constituted an indirect expropriation. It referenced an indirect expropriation to a regulatory taking.41Suez v. Argentina (Santa Fe Project), ICSID Case No. ARB/03/17, Decision on Liability, ¶ 121 (July 30, 2010). The inseparate elements constituted that the international wrongful doing unquestionably included governmental enactment or amendment of laws or regulations, and more.

C. Consequential Expropriation

The other, more elusive, type of indirect expropriation is “consequential expropriation.” The concept of consequential expropriation should be read with “a favorable condition for investment,”42This concept is derived from Article 31 of the Vienna Convention on the Law of Treaties of 1969, since most BITs intend to establish favorable investment conditions by nationals and companies of one state in the territory of the other state. Some commentators interpret the same concept as “healthy investment climate.” See generally Dolzer & Stevens, supra note 5. which is an important BIT feature offering foreign investors a suitable condition for investment. Through reliance on a mature and refined realization of “a favorable condition for investment,” BITs reflect the fact that the intersecting goal between investors and host States can be achieved. By contrast, consequential expropriation consists of a host State’s failure to create, maintain, and properly manage the legal, administrative, and regulatory normative framework contemplated by the relevant BIT, indispensable features of favorable investment conditions.43 Reisman & Sloane, supra note 5, at 128–29. The failure to provide an appropriate legal, administrative, and regulatory normative framework constitutes one category of indirect expropriation, or more precisely, of consequential expropriation.

Since “a favorable condition for investment” can be reached by creating, maintaining, and properly managing the legal, administrative, and regulatory normative framework, this begs the question: What elements comprise “a favorable condition for investment”? The 2003 Feldman v. Mexico case observed that “governments must be free to act in the broader public interest through protection of the environment, new or modified tax regimes, the granting or withdrawal of government subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and the like.”44Marvin Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1, Award, ¶ 103 (Dec. 16, 2002). The necessity that governments be free to act “in the broader public interest through protection of the environment” infers that host States have affirmative obligations to properly create, maintain, and manage favorable conditions for investment. Governments may be considered to have taken expropriatory action through failure to perform these obligations, whether through corrupt bureaucracies, simple negligence, or delay in making timely decisions in accordance with its contractual obligations.

What if the host State performs some “actions” which, alone, are insufficient to fulfill their obligations? In these circumstances, some may conclude that the ineffective “action” still constitutes consequential expropriation. While initially tempting, this proposition falls after even a cursory analysis. Substantially, any governmental action which “cannot properly create, maintain, and manage the legal, administrative, and regulatory normative framework” is unable to provide favorable conditions for investment, and in accordance with its ineffectiveness, should be considered as “non-action,” not an “action.” As such, only a “non-action” can truly constitute consequential expropriation. For example, if the host State promised to protect foreign investment facilities from being attacked by militiaman but failed, this constitutes consequential expropriation by non-action. This is true even if the host State actually provided limited protection, but it was inadequate to sufficiently cope with the militiaman, or if the host State provided protection after an unnecessary delay. These failures to act, insufficient actions, and delayed actions would all have been cognizable as failing to fulfill a favorable condition for investment, which should all be deemed as “non-actions,” and these non-actions are equal to “acts tantamount to expropriation.”

Moreover, a huge difference between consequential expropriation and all kinds of indirect expropriation, especially creeping expropriation, is that the former precludes any mens rea analysis.45Reisman & Sloane, supra note 5, at 129. Borrowing from criminal law, mens rea accounts for an actor’s awareness that his or her conduct is criminal. One function of a mens rea analysis is to give decision makers a standard to determine when an expropriation has taken place, specifically for a consequential expropriation. The justification of the absence of a host State’s intention under consequential expropriation is that the intention is replaced by the host State’s obligation of fulfilling favorable conditions for investment. Strictly speaking, consequential expropriation is completed only through non-action, and the intention of non-action is very hard to specify because there is no specific external environment to cause damages. Without a specific outer movement, Tribunals cannot specify a timeline to determine if the host State caused any damage before and after the movement. Because the existence of criminal intention needs to be specified with criminal activity, it is also challenging for the Tribunals to find the host State’s intention for causing damages.

Furthermore, some responsibility for an investment’s lost value could be ascribed to misjudgments from foreign investors or external economic factors; this complex series of interactions are all intertwined. To solve the issue of intention, a host State needs an additional obligation, which is a favorable condition for investment, to determine if its non-action constitutes a consequential expropriation. A similar argument can be seen in Phillips Petroleum Co. Iran v. Iran, which proposes that “a government’s liability to compensate for expropriation of alien expropriation does not depend on proof that the expropriation was intentional.”46Phillips Petroleum Co. Iran v. Iran et al., supra note 24, at 115–16 (1989) (indicating that even where a state is responsible to pay compensation, investors need not establish State intent). A foreign investor may be placed with an extremely high burden of proof, because there is no legal benchmark to support an intention to expropriation.47Bassant El Attar et al., Expropriation Clauses in International Investment Agreements and the Appropriate Room for Host States to Enact Regulations, available at http://graduateinstitute.ch/files/live/sites/iheid/files/sites/ctei/shared/CTEI/Research%20Projects/Trade%20Law%20Clinic/Expropriation%20clauses%20in%20International%20Investment%20Agreements%20and%20the%20appropriate%20room%20for%20host%20States%20to%20enact%20regulations,%202009.pdf. Especially in consequential expropriation, the state’s intention is almost impossible to prove, assuming that a discernable intention exists in the first place. A similar sentiment is echoed in Starrett Housing v. Iran.48Starrett Housing Corp. v. Iran, 4 Iran-U.S. Cl. Trib. Rep. 122, 154 (1983).

Another perplexity is identifying the causal relationship, or more precisely, the causal link between a host State’s failure to properly create, maintain, and manage the legal, administrative, and regulatory normative framework and a foreign investor’s particular loss. As non-action that could constitute consequential expropriation, by definition, does not change the external environment, it is difficult to determine whether, or to what extent, the host State has contributed to investors’ loss.49See Reisman & Sloane, supra note 5, at 130 (outlining two factors at play in evaluating contribution: (1) Whether the host State contributed to the loss, and (2) Whether the loss can be attributed to the foreign investor’s misjudgments or any other external factors). As well, the complex interactions between the host State’s failure to fulfill a favorable condition for investment, and the foreign investor’s faulty economic estimates, including external market factors, necessarily factor into, and further complicate, the causal relationship calculus. Therefore, it is extremely difficult to prove the causal relationship between the host State’s non-action and the foreign investor’s loss to the degree of requisite certainty. This has been demonstrated in both creeping and consequential expropriation contexts.

D. The Standard

Where government action or non-action is determined to be an indirect expropriation, it is essential to distinguish between a creeping/regulatory expropriation and a consequential expropriation. As discussed above, creeping expropriation is comprised of a series of inseparate elements,50Waste Management, Inc. v. United Mexican States, supra note 28, ¶ 17. such as a pattern of targeted administrative regulations and taxes. In this vein, regulatory expropriation can be seen as a sub-category of creeping expropriation, because regulatory expropriation occurs when a government uses “a series of regulations”, whether lawful or not, to deprive foreign investors of their property interests. Since consequential expropriation shares the same characteristics as creeping expropriation, for these purposes, the term “creeping expropriation” incorporates both “creeping” and “regulatory” expropriations.

To establish a standard to distinguish creeping expropriation from consequential expropriation, several criteria should be considered: (1) action and non-action, (2) the existence of intention, (3) the obligation of offering a favorable condition for investment, and (4) the causal relationship. Regarding action and non-action, the special character of creeping expropriation is that it is constituted by a number of inseparate elements which constitute an international wrongful doing or a slow and incremental encroachment on foreign investors’ property interests51Rubins & Kinsella, supra note 28, at 207. —and a series of actions or non-actions can satisfy these qualification requirements. By contrast, only non-actions can constitute consequential expropriation.

As discussed above, a host State’s failure to properly create, maintain, and manage the legal, administrative, and regulatory normative framework—its inability to provide favorable conditions for investment—constitutes a consequential expropriation. Ultimately, this failure may occur by an action or non-action; an action which is ineffective in offering favorable conditions is deemed null and void, thereby remaining a non-action. Creeping expropriation can thus arise from both action and non-action, while consequential expropriation can only arise from non-action.

With regard to the existence of intention, both creeping expropriation and consequential expropriation require a host State’s intention, because both categories of indirect expropriation and indirect expropriation would require, at the very least, that the Tribunal be satisfied that there was deliberate governmental interference. Since creeping expropriation is calculated by an aggregate of actions and non-actions, it is challenging to discern the point in time, if any, when the host State formed an intention. The only way to determine the host State’s intention is through retrospective analysis. While in creeping expropriation contexts, the host State’s intentions are difficult to discern, in consequential expropriation contexts this becomes even more difficult, as it arises from non-actions. To derive any meaningful intention from a non-action is very difficult, as there is no specific action or movement to cause damages—in fact, it is this very “non-action” that causes damage in the first place. As well, the causal relationship between a non-action and damages is similarly challenging to connect, since a non-action does not directly affect the world in the traditional sense. However, the difficulty to discern a host State’s intention and to link a causal relationship between a non-action and damages under consequential expropriation is justified by a host State’s obligation to offer a favorable condition for investment. If the host State fails to fulfill the favorable condition for investment, the host State’s responsibility is presumed. The standard can be charted as follows:

The benefit of this standard is that it is easier for a foreign investor to establish indirect expropriation. When the foreign investor files an indirect expropriation suit against the host State, the foreign investor has the burden of proof.52General principles place the burden upon the Claimant, since it is the Claimant’s duty to bring evidence to support allegations but also convince the Tribunals of their truth. See ICSID Arbitration Rules, art. 34; UNCITRAL Arbitration Rules, art. 27. However, it is never easy for a foreign investor, even a large private corporation, to prove both the host State’s intention and the causal relationship between non-actions and damages. Doubtless, there are situations in which some private corporations enjoy significant advantages in wealth and power compared to some States. However, generally speaking, the gap between a private corporation and a sovereign State remains wide, leading to an unequal status between both parties in the trials. Therefore, one alternative to achieve equality is to relieve the foreign investor claimant from the strict burden of proof. When indirect expropriation arises from non-action, the foreign investors can start an action stating that the host State failed to offer favorable conditions for investment under the BIT. If the foreign investor’s claim is based on an obligation under the BIT (e.g., fair and equitable treatment), the Tribunals should hold that the presence of damages presumptively arose from the host State’s failure to satisfy its BIT duties, requiring the host State to prove it was not negligent with regards to its obligations.53In other words, in consequential expropriation, if a foreign investor adduces evidence sufficient to raise a presumption indicating that a host State fails to achieve its duty under BIT, the burden then shifts to the host State, who will fail unless it can adduce sufficient evidence to rebut the presumption.

In Tradex v. Albania, the Claimant Tradex Hellas S.A. (“Tradex”), was a Greek corporation which established a joint venture with T.B. Torovitsa. Tradex claimed that invasions by villagers, as either a single event or a series of events, made development of the joint venture impossible, which they argued should be considered an act of expropriation.54Tradex Hellas S.A. v. Republic of Albania, ICSID Case No. ARB/94/2, Decision on Jurisdiction, ¶ 57(a–b) (noting two claims: (1) Crop production, cattle and seed supplies were stolen by the villagers at the steady rate of 15% from March to October 1992, often making joint venture management impossible due to threats and acts of violence, and (2) Beginning December 1992, the entry of Tradex personnel to the farm was rendered completely impossible, due to the farm’s seizure and occupation by villagers). The Tribunal concluded that the alleged invasion of villagers did not qualify as an expropriation.55Id., ¶ 167 (explaining that the other reason was that Tradex did not contact the authorities after the alleged invasions. In this case, the Claimant, in his seven letters to the government between October 1992 and July 1993, complained and asked for help, but never mentioned any alleged villager occupations). The tribunal stated that Tradex had an obligation to prove a taking, as well as to attribute the taking to the Albanian State.56Id., ¶ 197. Also, the Tribunal saw no evidence that the villagers were provoked by a State act.57Id., ¶ 147. In this case, Tradex, the Claimant, needed to prove the villagers’ actions were incited by the Albanian government, and it was a rigorous burden for Tradex to find the evidence. The efficient method to nullify the power disparity is to shift the burden. If the Albanian government did nothing to stop villager’s invasion, Tradex need only prove that the Albanian government failed to offer a favorable condition for investment under the Greece-Albania BIT,58Agreement on Encouragement and Reciprocal Protection of Investments, art. 3, Greece-Alb., Aug. 1, 1991, available at http://investmentpolicyhub.unctad.org/Download/TreatyFile/15 (regulating issues related to most favored-nation treatment and national treatment). after which point the burden is shifted to the Albanian government to prove it was not negligent with villager’s invasion, or else face a finding of consequential expropriation.

III. Shifting the Burden of Proof in International Arbitration Practices

Shifting the burden of proof is not a novel concept in international arbitration law. Pursuant to Paragraph 1, Article 27 of UNCITRAL Rules, each party shall have the burden of proving the facts relied on to support its claim or defense. Paragraph 4, Article 20 of UNCITRAL Rules states the duty to supplement any claim with references to supporting or establishing records.59UNCITRAL Arbitration Rules, art. 20 (“The statement of claim should, as far as possible, be accompanied by all documents and other evidence relied upon by the claimant, or contain references to them”). Nevertheless, there is still some debate about what the burden-shifting framework actually represents. Some commentators say that the shifting burden of proof is only relevant at the analysis stage, meaning that the Tribunal will first analyze all the evidence in favor of the statement rendered by the Claimant, and then, only afterward will they consider the evidence against the Claimant’s statement.60Michelle Grando, Evidence, Proof, and Fact-Finding in WTO Dispute Settlement, 127 (2009). In essence, this means that the burden of proof is set at the very beginning and remains with the same party throughout the case. However, there are several problems with this explanation, considering the difficulty for the Tribunal to determine whether evidence is favorable or unfavorable before actually examining it.

A more common illustration of shifting the burden of proof refers to a tactical court proceeding. For example, when both the Claimant and the Respondent are producing evidence, one merely remains quiescent. The rationale is that since only one of the parties will suffer from an adverse ruling given by the Court, the party who has the burden of proof cannot persuade the Tribunal to believe that the proposition rendered is factual.61Id. at 128. When the party originally bearing the burden produces enough evidence in his favor, the other party summits evidence to contradict the evidence produced by its opponent or to disprove the notion that the Claimant presented a prima facie case. In short, the Claimant satisfied its burden of proof by establishing a prima facie case; after that, the respondent must rebut the case. In other words, the reason why the burden of proof shifts during proceedings is mainly based on courtroom tactics. A party that fails to prove a fact has to bear the burden that the Tribunal will rule that fact against it.

That the burden of proof shifts from one party to the other is based around the notion of proof proximity. The Tribunal may shift the risk of non-production to a party, because the party has exclusive control over relevant evidence, but has refused to produce it.62Nathan O’Malley, Rules of Evidence in International Arbitration: An Annotated Guide, 214 (2012). The legal basis of shifting the burden of proof is located in Paragraph 3, Article 27 of the UNCITRAL Rules.63UNCITRAL Arbitration Rules, art. 27. The Tribunal has the discretionary power to ask two parties to produce evidence related to the present case. However, such documents, exhibits or other evidence cannot be submitted by the Claimant because of proof proximity; instead, the Tribunal has the right to ask the Respondent to submit evidence during the arbitral proceedings. The power to determine admissibility, relevance, materiality and the weight of the submission belongs to the Tribunal.64Id. In foreign investment, it is ordinary for both foreign investors and the host State to receive their own solely-controlled documents, since the nature of foreign investment contains much complexity and confidentiality.

Additionally, the need to secure evidence also plays a role in the context of BITs, among other things. This was evident in Sola Tiles, Inc. v. The Government of the Islamic Republic of Iran case. There, the Tribunal stated that “[w]hile the Claimant must shoulder the burden of proving best of the value of expropriated concern by the best available evidence, the Tribunal must be prepared to take some account of disadvantages suffered by the Claimant, namely its lack of access to detailed documentation, as an inevitable consequence of the circumstances in which the expropriation took place.”65Sola Tiles, Inc. v. The Government of the Islamic Republic of Iran, 14 Iran-U.S. Cl. Trib. Rep. 223, 238 (1987). The Tribunal in Pope & Talbot Inc. v. The Government of Canada also studied the distribution of the burden of proof in regard to Article 1102 of NAFTA. The Claimant created a presumption that Article 1102 of NAFTA had been violated, and thus shifted the burden of proof to the host State to prove that the discriminatory measures were justified by legitimate national policy considerations.66Aristidis Tsatsos, Burden of Proof in Investment Treaty Arbitration Shifting, 6/2009 Humboldt Forum Recht 91, 98 (2009).

IV. Concluding Remarks

International disputes always need to be examined case-by-case. The balance between host State sovereignty and foreign investor protection is always uneven, because of the inferior situation of foreign investors. Normally, private enterprise finds it difficult to compete with any State either economically or politically, not to mention the case where the private enterprise is foreign-owned and operated. This paper reviewed the elements of indirect expropriation, creeping expropriation as well as consequential expropriation, and concludes that creeping expropriation and consequential expropriation are categories of indirect expropriation. The standard distinguishing creeping expropriation from consequential expropriation is that the former can be completed by actions and non-actions, and criminal intention and causal relationship can only be reviewed through the retrospective method. By contrast, the latter can only be completed by non-action, and the latter’s intentions and causal relationships are shifted by providing favorable investment conditions. If the foreign investor can prove that the host State failed to accomplish its obligation under the BIT, the burden of proof is transferred to the host State to disprove that case.

References   [ + ]

01. Christoph Schreuer, The Concept of Expropriation under the ECT and other Investment Protection Treaties 9 (2005), available at http://www.univie.ac.at/intlaw/pdf/csunpublpaper_3.pdf.
02. UNCTAD, Investor-State Disputes Arising From Investment Treaties: A Review 41 (2005).
03. Dominican Republic-Central America Free Trade Agreement, 19 U.S.C. § 4001 (2005), available at http://www.ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta/final-text. Note that the approach taken in other similar treaties (e.g., the Australia-Chile Free Trade Agreement (FTA) (2006), the Japan-Philippines FTA (2008), the Egypt-Germany BIT (2005), the Mexico-United Kingdom BIT (2006) and the Japan-Lao People’s Democratic Republic BIT (2008)) was to clearly define what constitutes a direct and indirect expropriation, as well as to set out specific criteria in order to find that an indirect taking has taken place.
04. William Reisman & Robert Sloane, Indirect Expropriation and its Valuation in the BIT Generation, 74 Brit. Y.B. Int’l L. 119 (2004); see also Burns Weston, Constructive Takings Under International Law: A Modest and Foray into the Problem of Creeping Expropriation, 16 Va. J. Int’l L. 103, 106 (1975); Mustafa Erkan, International Energy Investment Law: Stability Through Contractual Clauses 63–64 (2010); Rudolf Dolzer & Margrete Stevens, Bilateral Investment Treaties 99 (1995).
05. North American Free Trade Agreement, art. 1110 U.S.-Can.- Mex., Dec. 17, 1992, 32 I.L.M. 289 (1993).
06. Schreuer, supra note 2.
07. Norwegian Shipowners’ Claims (Nor. v. U.S.), 1 R.I.A.A. 307 (Perm. Ct. Arb. 1992).
08. Certain German Interests in Polish Upper Silesia (Germ. v. Pol.), 1926 P.C.I.J. (ser. A) No. 7 (May 25).
09. Reisman & Sloane, supra note 5, at 119–20; see also George Christie, What Constitutes a Taking Under International Law, 38 Brit. Y.B. Int’l L. 311 (1962).
10. Ian Brownlie, Principles of Public International Law 534 (1966).
11. Tippetts v. TAMS-AFFA Consulting Engineers of Iran, 6 Iran-U.S. Cl. Trib. Rep. 219, 225–26 (1984).
12. Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶ 103 (Aug. 30, 2000).
13. LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, ¶ 60 (Oct. 3, 2006) (applying the same substantial deprivation approach in another case).
14. Compañia del Desarrollo de Santa Elena, S.A. v Costa Rica, ICSID Case No. ARB/96/1, Final Award, ¶ 77 (Feb. 17, 2000).
15. Pope & Talbot Inc. v. Government of Canada, UNCITRAL, Interim Award, ¶ 96 (Jun. 26, 2000).
16. S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award, ¶ 283 (Nov. 13, 2000).
17. BG Group v. The Republic of Argentina, UNCITRAL, Final Award, ¶ 271 (Dec. 24, 2007).
18. Id. ¶ 270.
19. Sea-Land Service Inc. v. Iran, 6 Iran-U.S. Cl. Trib. Rep. 149, 166 (1984).
20. Tippetts v. TAMS-AFFA Consulting Engineers of Iran, supra note 12, at 225–26.
21. S.D. Myers, Inc. v. Government of Canada, supra note 17, ¶ 285.
22. Reisman & Sloane, supra note 5, at 121.
23. Phillips Petroleum Co. Iran v. Iran et al., 21 Iran-U.S. Cl. Trib. Rep. 79, at 115–16 (1989).
24. Reisman & Sloane, supra note 5, at 121.
25. Dolzer & Stevens, supra note 5, at 100.
26. Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, ¶ 20.22 (Sep. 16, 2003).
27. Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/98/2, Dissenting Opinion (of Keith Highet), ¶ 17, (May 8, 2000).
28. Noah Rubins & Stephan Kinsella, International Investment, Political Risk and Dispute Resolution: A Practitioner’s Guide, 207 (2005).
29. O.E.C.D. Draft Convention on the Protection of Foreign Property, Text with Notes and Comments, 7 I.L.M. 118 (1968).
30. Restatement (Third) of the Foreign Relations Law of the United States Vol. II § 712 (1987).
31. UNCTAD, supra note 3, at 42.
32. Dolzer & Stevens, supra note 5, at 100.
33. Reisman & Sloane, supra note 5, at 123; see also Vance R. Koven, Expropriation and the “Jurisprudence” of OPIC, 22 Harv. J. Int’l L. 269, 291 (1981).
34. Generation Ukraine, Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, ¶ 20.22 (Sep. 16, 2003).
35. Schreuer, supra note 2, at 35.
36. Admittedly, some commentators indicate that an intention to expropriate is not essential and the purpose that serves the public interest is not decisive. However, in this paper, it is considered that a host State’s intention is always an essence for contemplation: In creeping expropriation, it is a retrospective method to determine the existence of intention, and in consequential expropriation, the existence of intention is transferred to a host State’s obligation for offering a favorable investment condition. By the gradual and cumulative nature, the moment of interference is also problematic to specify since the actions or non-actions of creeping expropriation are a series of governmental movements or policies.
37. Sedco, Inc. v. Nat’l Ir. Oil Co., 10 Iran-U.S. Cl. Trib. Rep. 180, 206 n. 42 (1986) (Brower, Arb., concurring).
38. UNCTAD, supra note 3, at 42.
39. Mustafa Erkan, International Energy Investment Law: Stability Through Contractual Clauses, 63–64 (2010); Schreuer, supra note 2, at 28 (discussing the two criteria for establishing the threshold between a simple regulation and a regulatory expropriation: The first criterion is a quantitative test that looks into the severity of the effect on the investment. The other is a motive-oriented test that would look for the existence of an intention to expropriation).
40. Waste Management, Inc. v. United Mexican States, supra note 28, ¶ 17.
41. Suez v. Argentina (Santa Fe Project), ICSID Case No. ARB/03/17, Decision on Liability, ¶ 121 (July 30, 2010).
42. This concept is derived from Article 31 of the Vienna Convention on the Law of Treaties of 1969, since most BITs intend to establish favorable investment conditions by nationals and companies of one state in the territory of the other state. Some commentators interpret the same concept as “healthy investment climate.” See generally Dolzer & Stevens, supra note 5.
43. Reisman & Sloane, supra note 5, at 128–29.
44. Marvin Feldman v. Mexico, ICSID Case No. ARB(AF)/99/1, Award, ¶ 103 (Dec. 16, 2002).
45. Reisman & Sloane, supra note 5, at 129.
46. Phillips Petroleum Co. Iran v. Iran et al., supra note 24, at 115–16 (1989) (indicating that even where a state is responsible to pay compensation, investors need not establish State intent).
47. Bassant El Attar et al., Expropriation Clauses in International Investment Agreements and the Appropriate Room for Host States to Enact Regulations, available at http://graduateinstitute.ch/files/live/sites/iheid/files/sites/ctei/shared/CTEI/Research%20Projects/Trade%20Law%20Clinic/Expropriation%20clauses%20in%20International%20Investment%20Agreements%20and%20the%20appropriate%20room%20for%20host%20States%20to%20enact%20regulations,%202009.pdf.
48. Starrett Housing Corp. v. Iran, 4 Iran-U.S. Cl. Trib. Rep. 122, 154 (1983).
49. See Reisman & Sloane, supra note 5, at 130 (outlining two factors at play in evaluating contribution: (1) Whether the host State contributed to the loss, and (2) Whether the loss can be attributed to the foreign investor’s misjudgments or any other external factors).
50. Waste Management, Inc. v. United Mexican States, supra note 28, ¶ 17.
51. Rubins & Kinsella, supra note 28, at 207.
52. General principles place the burden upon the Claimant, since it is the Claimant’s duty to bring evidence to support allegations but also convince the Tribunals of their truth. See ICSID Arbitration Rules, art. 34; UNCITRAL Arbitration Rules, art. 27.
53. In other words, in consequential expropriation, if a foreign investor adduces evidence sufficient to raise a presumption indicating that a host State fails to achieve its duty under BIT, the burden then shifts to the host State, who will fail unless it can adduce sufficient evidence to rebut the presumption.
54. Tradex Hellas S.A. v. Republic of Albania, ICSID Case No. ARB/94/2, Decision on Jurisdiction, ¶ 57(a–b) (noting two claims: (1) Crop production, cattle and seed supplies were stolen by the villagers at the steady rate of 15% from March to October 1992, often making joint venture management impossible due to threats and acts of violence, and (2) Beginning December 1992, the entry of Tradex personnel to the farm was rendered completely impossible, due to the farm’s seizure and occupation by villagers).
55. Id., ¶ 167 (explaining that the other reason was that Tradex did not contact the authorities after the alleged invasions. In this case, the Claimant, in his seven letters to the government between October 1992 and July 1993, complained and asked for help, but never mentioned any alleged villager occupations).
56. Id., ¶ 197.
57. Id., ¶ 147.
58. Agreement on Encouragement and Reciprocal Protection of Investments, art. 3, Greece-Alb., Aug. 1, 1991, available at http://investmentpolicyhub.unctad.org/Download/TreatyFile/15 (regulating issues related to most favored-nation treatment and national treatment).
59. UNCITRAL Arbitration Rules, art. 20 (“The statement of claim should, as far as possible, be accompanied by all documents and other evidence relied upon by the claimant, or contain references to them”).
60. Michelle Grando, Evidence, Proof, and Fact-Finding in WTO Dispute Settlement, 127 (2009).
61. Id. at 128.
62. Nathan O’Malley, Rules of Evidence in International Arbitration: An Annotated Guide, 214 (2012).
63. UNCITRAL Arbitration Rules, art. 27.
64. Id.
65. Sola Tiles, Inc. v. The Government of the Islamic Republic of Iran, 14 Iran-U.S. Cl. Trib. Rep. 223, 238 (1987).
66. Aristidis Tsatsos, Burden of Proof in Investment Treaty Arbitration Shifting, 6/2009 Humboldt Forum Recht 91, 98 (2009).

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