22 January 2001
Two recent arbitrations have sparked discussion in public international law circles: Metalclad v Mexico and SD Myers Inc v Canada both addressed the definition of expropriation in public international law under the North American Free Trade Agreement (Nafta), although in Myers, the tribunal concluded there was no expropriation.
Under international law, expropriation is the taking of property by a government or governmental-type authority, not limited to taking by force. It can extend to taking by use of legislation or taxes and tends to involve the deprivation of ownership rights by a transfer of property or benefit directly to others.
Some lawyers believe that the rulings show how the definition of expropriation has widened, and are surprised by the Metalclad ruling, saying that it deviates from classical expropriation, which is the physical taking of property rather than the deprivation of a right to exploit a landfill site.
Campbell McLachlan, head of international law at Herbert Smith, says that new forums for resolving investment disputes where foreign investors are seeking redress against the actions of a host state are encouraging expropriation cases. He adds that states are increasingly willing to submit to dispute resolution in order to encourage foreign investment. "The exciting point about this jurisprudence is that it shows the increasingly effective remedies available to investors against the host state, and that public international litigation is becoming not exceptional, but mainstream," he says.
Some believe that the Metalclad ruling creates new law on transparency, but McLachlan disagrees, because, as the local construction permit was not withheld for legitimate ends, there was no reason why the tribunal could not look at the decision-making process. "In order to reach a decision, Metalclad needed to examine the decision-making process of the government to decide if there had been expropriation. The Nafta [definition] includes laws, regulations, procedures and practices, so if by adopting a law or procedure the state has done something to deprive investors from their investment, it is not surprising to look at the decision-making process."
Robert Volterra is head of the public international law group at Freshfields Bruckhaus Deringer. He says that Metalclad shows that a government not totally transparent in its administrative procedures could be found to be conducting indirect expropriation, as investors have a right to conduct investments in complete transparency. "What Professor Lauterpacht [the arbitration chairman] said is not controversial as such, but how he applies it to the facts is interesting because he set the standard very high for a government."
In Myers, the applicant tried to expand Nafta's definition of "tantamount to expropriation", arguing that the government acts complained of were tantamount to expropriation because they were more than expropriation rather than equivalent to it. The applicant's venture into the Canadian market was postponed for 18 months. Volterra explains that in some cases a partial or temporary deprivation could be viewed as expropriation, but in this case the delayed opportunity did not involve a transfer of property or benefit to others.
Arthur Marriott QC, a partner at Debevoise & Plimpton, says of the two rulings: "I don't think the decisions are fundamentally changing the rules of the game, nor the duties of transparency or openness." Marriott instead believes that we are simply witnessing the principles of expropriation being applied. "While some may quarrel with the [Metalclad] decision, Lauterpacht and his colleagues have not applied different principles in deciding what is expropriation. The principles haven't changed, but have application in a growing set of circumstances." Myers, he says, demonstrates the "liberal approach taken by international tribunals, but not by departing from well-established principles". But he does acknowledge that "many think the decision went too far and many eyebrows were raised".
He adds: "The tribunals recognise that they're there to do justice on the facts and then fit [the decision] into a legal cubby hole. Is it one or the other or all three of due process, discrimination or expropriation?"
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