The consequences of the distinction between lawful and unlawful expropriation of foreign investment

Abstract

The paper deals with legal and factual consequences of the distinction between lawful and unlawful expropriation of a foreign investment by the host state. The author analyses the impact which the legality of expropriation has on the amount of compensation owed by the host state, an issue of whether the indirect expropriation can ever be lawful and the consequences which illegal expropriation has on recognition of such an act in territories of other countries. It is well established in contemporary arbitral practice that the illegal expropriation entails an obligation of the host state to pay the investor not only the amount equal to the market value of the investment at the time of expropriation, but also the sum which would include the increase of the investment's value from the moment of taking to the date on which the arbitral award is issued. Although the arbitration practice and legal doctrine generally accept that an indirect expropriation is automatically unlawful, due to the fact that the host state does not offer any compensation to the aggrieved investor, such view is logically unsound and irreconcilable with the duty of states to regulate in general interest. The conclusion of an arbitral tribunal that the state has conducted an indirect expropriation should be seen as a precondition which triggers the secondary obligation of the state - to pay an adequate compensation for the property taken provided for in the BIT. Actions of the host state should be regarded as a breach of international obligation and could activate the application of the stricter standard of compensation only if the host state ignores the duty to compensate the investor. The negative consequences of illegal expropriation may be reflected in the non-recognition of its effects on the territory of other states. However, these effects are highly dependent on the willingness of national courts to engage in a review of the legality of conducts of another state.