Expropriation and Compensation of Foreign Term Paper

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The State is just taking back its rightful property under the contractual obligations of the agreement signed between the host State and the foreign investor who' assets are being seized in the expropriation. Another cause for direct expropriation is the concept that the State will in some way gain financially, socially, or economically from the expropriate assets beyond their value of compensation. If a particular investment can generate more positive results in the hands of the State, it is legal to file expropriation proceedings if the full value of compensation is covered as determine by an international tribunal.

In the European Union, direct expropriations are most common. Based on a common peace and favorable diplomatic relations between the countries within the European Union, there is little need for many investors to worry about unlawful and forceful expropriation, as seen in developing or communist nations. Some investors may invest within a host nation without special regulations regarding the fate of the property in the event of an expropriation or nationalization dispute. However, in more developed nations, many foreign investors are confident in the stability of the host country to not have to demand special restrictions and regulations, (Ripinksy & Williams 2008). Direct expropriation is more based on the needs of the State and generally stipulates the need for proper compensation on behalf of the State. Therefore, within the European Union, which is more developed and less of a risk for nationalization, direct expropriations are much more common than the trickier indirect expropriations.

However, in developing countries, direct expropriation can still be as tricky as indirect expropriations. There is more of a risk for foreign investors, and so many stipulate standards in investment agreements which guarantee some protection of the foreign investor's assets. It is these protections which will eventually help secure compensation for foreign investors in international tribunals. Without such stipulations, direct expropriation may come ungrounded within the context of international investment laws, and therefore result in potential years of trials and hearings to clear the matter and properly compensate the foreign investor for the lost asset.

Indirect Expropriation

Unlike direct expropriation, indirect expropriation is much harder to deal with when disputes between the investor and State arise. Because of the nature of indirect expropriation, it tends to be much more debatable between both parties, State and investor. Indirect expropriation has been used "to create a seemingly stronger presumption in favor of state public welfare regulations than previous cases," (Edsall 2007:934). States use indirect expropriation to promote social welfare and protect their sovereignty from invading foreign exploiters. It was the right given to States to exercise their sovereignty within their own borders, yet has also lead to great damages incurred by foreign investors who have been wrongly expropriated from various States. The move to indirectly expropriate a foreign investor may in fact actually "deprive the owner, in whole or in significant part, of the use or reasonably-to-be expected economic benefit of property," (Edsall 2007:937). Indirect expropriation is executed by States in order for their own public good. In the modern context, "There are very few cases of indirect expropriation at the international level because under customary international law, a state is not responsible for loss of property or other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture from crime, or other action of the kind," (SICE: 1). This leaves the resolution of indirect expropriation cases harder to work out, with much more risks involved on behalf of the foreign investor who lost assets or property in a particular State. However, a State may also ultimately decide to use an indirect expropriation in the event of a breach of contract on behalf of the investor. Although not typical in international cases, if this breach of contract has in some way placed the good of the people in the host State in jeopardy, that State is allowed the right to commence expropriation. In international law, "it is generally accepted that an indirect expropriation may occur in the form of a material breach or cancellation of a contract," (Weiler 2005:296). Therefore, the State may exercise its right to take back property and assets under a contract breach.

In the European Union, indirect expropriation is normally limited to European countries and their dealings with developing nations. Typically, measures leading up to an indirect expropriation, especially in cases of a breach of contract, are handled locally by domestic courts in the European Union. Since there is much more stability in this region than in other areas of developing nations, there is little worry of investors about the State taking their assets for the nature of the public good (Hober 2007). However, European companies and individual investors have begun protecting themselves from indirect expropriation of assets in other developing nations with various treaties and umbrella clauses in investment agreements. Under these types of clauses, proper evidence for a legal indirect expropriation becomes difficult to prove, "The object and purpose of the umbrella clause is to add extra protection to the investor. It dispenses with the often difficult proof that there has been an indirect expropriation or a violation of the fair and equitable standard under the treaty," (Weiler 2005:301). Yet, even under the context of these treaties and clauses, if a company or single investor breaches contract, there may still be open room for the commencement of an indirect expropriation. International law states that the State has a right to protect its contracts, "International courts and tribunals have held repeatedly that measures by a State, affecting rights under a contract, may amount to an expropriation," (Weiler 2005:296). And so, legal indirect expropriation is most possible in the event of a deliberate breach of contract by the foreign investors.

Legality of Expropriation

There are strict legal restrictions to the nature and legality of expropriation under today's international investment laws and regulations. According to such international laws, "expropriation cannot be made without a fining of 'injury' to the investor (due to the deprivation of its investment) and of 'causation' between the respondent's conduct and such injury," (Ripinksy & Williams 2008:142). Expropriation itself is a State's lawful right to exercise its own sovereignty (Hober 2007). When a contract is breached or the good of the public of that State is placed in jeopardy, the State has right to take back all assets and properties which lie within its national borders. However, there are also legal obligations that States must follow in order to lawfully conduct an expropriation under international laws. The State must not be infringing upon any stated contracts or treaties between nations, and must also be within the grounds of the stipulations given by the ICSID. In the event of an expropriation, proper compensation must be awarded to the investor for the investment assets. These compensations can increase if the expropriation was conducted illegally. Therefore, it is important within the modern context for nations to act under strict adherence to international guidelines which pertain to the legality of the given expropriation.

The modern unity of the European Union ensures a much easier and level playing field regarding the legality of expropriations seen within the context of its borders. Trade treaties invoked by membership of a State within the European Union itself are set up to handle breaches of contracts and ensuring the legality of proper expropriation between member States. These treaties are regulated by the State itself, the European Union, and the international tribunals and bodies governing over investment laws and relations between nations.

However, it is within the context of dealing with developing nations in which the strength of treaties and investment agreements can prove essential. In previous generations, investment dealings with developing nations have proven risky, but "Today, there is less controversy surrounding this issue because the great majority of investor-State disputes are brought pursuant to investment treaties which typically fix a specific standard," (Ripinksy & Williams 2008:71). Treaties with developing nations help ensure the safety of the investor's assets and helps keep the State liable for its actions in expropriating foreign assets. These treaties can help keep a developing State in check from acting wrongfully under more developed international law, "Investment treaties regulate State action. Claims under investment treaties therefore are limited to claims that the State itself failed by act or omission to comply with the specific obligations undertaken in the relevant treaty," (Weiler 2005:17). Rather than leaving the fate of the investment dispute in the hands of domestic courts, a breach of a treaty means that the matter goes far beyond that of a typical domestic dispute. When such treaties are broken by the State during an unlawful expropriation, the matter can no longer be judged domestically within the host country. Once the stipulations of the treaty have broken, the dispute becomes one to be handled by the statutes of international law. The tribunals conducted by the ICSD and all of the regulations involved in foreign investing stipulates that cases of expropriation do occur, they must be…[continue]

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