Expropriation Jurisprudence

Expropriation Jurisprudence under NAFTA

By Dr. Howard Mann and Dr. Julie A. Soloway (March 31, 2002)

The limits of analyzing the jurisprudence

It is important to keep in mind that there are limits to the value of analyzing the jurisprudence because, under international law, Chapter 11 decisions have no stare decisis. A NAFTA arbitral tribunal’s ruling is not binding on subsequent NAFTA arbitral tribunals.(See Articles 38 and 59 of the Statute of the International Court of Justice) In one recent case, a NAFTA arbitral tribunal declined to follow a ruling made by a previous tribunal on Article 1105 noting that the previous case is not “… a persuasive precedent on this matter and [this Tribunal] will not be bound by it.” That said, a NAFTA arbitral tribunal will consider, among other things, the decisions of past NAFTA arbitral tribunals, as well as the decisions of tribunals in other contexts.(Daniel M. Price, “Chapter 11 – Private Party vs. Government, Investor-State Dispute Settlement: Frankenstein or Safety Valve? (2000) 26 Can.-U.S. L.J. 107 at 111) Thus, while not binding, the case law is an important element guiding all concerned parties.

What is the legal test for expropriation?

The Azinian case (Desona v. Mexico)(Robert Azinian et al. v. United Mexican States, Award, International Centre for Settlement of Investment Disputes, Additional facility, case No. ARB(AF)/97/2) was the first case to address the issue of expropriation on the merits. While it did not actually make a decision on a test for expropriation, it did make some introductory comments. First, the Tribunal notes that NAFTA was not intended to protect against disappointments in dealings with governments, or disagreements with the final results of different government dealings. Neither of these situations found a claim under NAFTA, which requires a breach of an express obligation on governments. This limits the context in which a claim for an expropriation can be made.

Both authors agree that the test for expropriation that has emerged from the cases is consistent with our understanding of international law more broadly in this area. This test can be summarized in the following statements from the Pope & Talbot decision:

“An interference with the investment’s business activities substantial enough to be characterized as an expropriation.” (Pope & Talbot, para. 9610)

This statement in and of itself is obviously circular, an expropriation is made out when the impacts of an action are large enough to constitute an expropriation. Reliance must be placed on a subsequent paragraph to flesh out its intent more clearly:

“The test is whether that interference is sufficiently restrictive to support a conclusion that the property has been “taken” from the owner. … Action that is confiscatory, or that prevents, unreasonably interferes with or unduly delays, effective enjoyment of an alien’s property.”(Pope & Talbot, para. 102)

These statements place a clear focus on the degree or significance of interference with the use or effective enjoyment of property as the key test. Specific factors referred to in the Pope & Talbot analysis support this test: they highlight the absence of nationalization in that case, that there was no loss of control, and note that lots of exports continued to be made by Pope & Talbot with commensurate profits from those exports. Based on these factors and the above noted tests, Pope & Talbot found there was no substantial interference with the property in that case, and hence no expropriation.

This focus on degree of interference with property rights as the test for expropriation is repeated in the Metalclad case. The test adopted in this decision is quite clear. The Tribunal makes its view clear that expropriation includes not just an outright seizure or formal transfer of title,

“But also any covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.”(Metalclad Corporation v. Mexico, Award, International Centre for Settlement of Investment Disputes, Additional facility, Case No. ARB(AF)/97/1, para. 103)

Thus, Metalclad adopts the same degree of interference test (based on a significant impact) that is seen in Pope & Talbot. Neither case, however, sets out a specific test for what exactly constitutes a “significant impact” and one may reasonably expect some difficulty in setting an exact test of what constitutes a significant impact. Context will be a factor, and some degree of judgment will rest with the arbitral tribunal. If arbitral tribunals do use a test of substantial interference, this will likely create a high hurdle for there to be a finding of expropriation.

On the other hand, some argue that there is no clear indication that the test will be interpreted in such a way to be substantial or significant. The Pope & Talbot decision does stand for the proposition that a de minimus impact will not constitute an expropriation, and does suggest a reasonable threshold is needed. But none is established. Other experience in, for example, Canadian environmental assessment law cases have defined significant simply as any impact that is not insignificant. Such a low threshold would not create a high hurdle to a finding of expropriation.

The S.D. Myers case is the only one of the four completed cases that appears to have gone beyond just a significant impact test. This decision expressly states that regulatory measures do not normally constitute an expropriation, but adds to that the view that one cannot rule out the possibility that in some cases it will.(S.D. Myers, para. 280-281) This opening view of the Tribunal will be returned to below. Closely related to this statement is the clearly expressed view that when examining the question of expropriation, it is important to evaluate the purpose and effect of a measure.(S.D. Myers, para. 281, 285) On the one hand, this suggests a role for the police powers rule, which is very much a purpose-based construct. On the other hand, this statement also suggests something that we have already noted our agreement upon, that the analysis must be based on substance, not form.

Having set out the need for a purpose and effect analysis, the factors and tests that the tribunal then turns to are important. In particular, the question arises as to whether they are different from those of the Pope & Talbot tribunal, which did not enunciate the need for a purpose and effect analysis. The analysis suggests that the extent to which they differ appears to be small, at most.

The main S.D. Myers decision set out several specific factors for consideration in this case:

• A deprivation of ownership rights v. a lesser interference;
• Expropriation is usually a lasting interference (but may not always be);
• Whether any benefit is realized by the enacting party.(S.D. Myers, The Tribunal never addressed the question whether a transfer of economic activity among different actors could constitute a potential benefit for a third party. Rather, it has delayed this issue to the damages phase of the process)

Based on these factors, the Tribunal ruled this was not a case of an expropriation, as the measure was temporary, did not involve a deprivation of ownership rights and did not confer any benefit on another party.(S.D. Myers) These factors clearly go to issues of degree of impact, as in the previous cases. What is less clear is whether they also go to distinguishing bona fide regulatory measures from other types of measures with the aim of excluding the latter from the scope of expropriatory measures. This lack of clarity stems from the use, primarily of the same type of degree of interference criteria, rather than criteria that actually address a purpose and effect distinction.

The separate opinion in the S.D. Myers case by Bryan Schwartz states that regulatory conduct is not remotely the subject of legitimate complaint, but then adds the caveat, “in most cases.”(S.D. Myers, Schwartz separate opinion) Schwartz also invokes the need for a purpose and effect analytical approach. However, we again must consider whether tests or criteria are set out that distinguish how one might look at the purpose as opposed to the effect. Schwartz includes some criteria that appear to address this issue:

• Severe deprivations v. much lesser interference (the main judgement only talks of “lesser” interference)(S.D. Myers, Schwartz separate opinion)
• Does it enrich the state or a third party to whom property is given?(S.D. Myers, Schwartz separate opinion)
• Is there an unfair deprivation on one side and an unjust enrichment on the other(S.D. Myers, Schwartz separate opinion)
• Regulation tends to prevent the use of a property in a way that unjustly enriches the owner, through e.g. pollution of public property, etc.(S.D. Myers, Schwartz separate opinion)

Schwartz concludes his analysis by noting there was no clear transfer of wealth here, and that the measure was temporary. However, he actually concludes by stating that he would “refrain from characterizing the export ban as an expropriation” in this case due to the political concern that issues surrounding expropriations were the most inflammatory in the public debate, so no ruling should be made on this unless necessary.(S.D. Myers, Schwartz separate opinion). Given this conclusion, the potential relevance of the criteria set out for distinguishing expropriation from regulation, if that is a correct characterization of the criteria, may lack some weight. More concerning, is that the decision not to make a finding after extensive reasoning does not allow us to fully clarify what criteria or tests would apply to the caveat to his introductory, that regulatory conduct is not the subject of legitimate complaints “in most cases”.

Summarizing the above, one finds a consistent reference to a degree of interference test for finding an expropriation, based on a standard of significant interference. In principle, we take no exception to this approach. A concern remains in terms of defining what constitutes a significant impact, but again both authors are aware that a single definition of this without context will be impossible. That does not remain a totally satisfactory answer, but this is likely not the most critical question either in the context of this paper.

The test for the application of the police powers

For information on this issue (police powers in relation to Expropriation Jurisprudence), click here.

The scope of the protected property rights set out in the cases

The main issue to address in this section concerns the potential extension of protected property rights under Chapter 11. Easily recognizable as protected rights would be the right to remain in possession of a property in law, to be able to operate and manage it in fact, and not to be stripped directly or indirectly of beneficial interests, profits, etc. The question that arises is whether Chapter 11 has expanded these types of property rights. The issue is related to the expropriation/regulation debate because the broader the array of protected rights, the broader the array of measures that can be brought within the scope of Article 1110.

One issue in particular illustrates this point. Pope & Talbot found that access to market share, including though trade, was a protected right, noting in particular the key export component of its business.(Pope & Talbot, paras. 96-98) This same issue is still under consideration on the damages phase of the S.D. Myers case.(S.D. Myers, Schwartz separate opinion). This putative right would have a significant impact on the argument in S.D. Myers that an expropriation requires some form of transfer of benefit. If market share constitutes a protected asset, and market share is shifted directly or indirectly by a measure, a transfer of benefit would thereby be made out and this test in the S.D. Myers case satisfied. This would increase the risk of a regulatory measure being found to be an expropriation.