Transnational Construction Arbitration

Renato Nazzini

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CHAPTER 9 Expropriation of contractual rights in investment treaty arbitration

Introduction

9.1 International law has recognised that not only tangible property but also contractual rights may be expropriated by states and that expropriation claims may be pursued in arbitration proceedings as provided in investment treaties. 9.2 However, does this mean that every failure by a government to perform its contractual obligations amounts to expropriation? This chapter shall investigate the general principles that have emerged from the case law regarding the expropriation of contractual rights and shall analyse the particularities and circumstances surrounding the expropriation claims. 9.3 It will then set out the conclusions that can be drawn from such analysis.

General principles surrounding the expropriation of contractual rights

9.4 According to most bilateral and multilateral investment treaties states have the sovereign right to take property belonging to foreign nationals provided that certain conditions are met, namely:

(a) the property is taken for a public purpose;
(b) the property is taken on a non-discriminatory basis;
(c) it is taken in accordance with due process; and
(d) it is accompanied by fair compensation.

9.5 Protection from the expropriation of property outside of these specified conditions is embodied in the majority of modern investment treaties.1 9.6 In simple terms, property may be expropriated either directly or indirectly. 9.7 In order for the conduct of the state to constitute an expropriation, one of the key factors considered by tribunals, particularly in instances of indirect expropriation, is the effect of the state’s acts. In order for the state’s acts to constitute expropriation, the interference with the investor’s rights must be such as substantially to deprive the investor of the economic value, use or enjoyment of its investment.2

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9.8 The starting point for any review of whether contractual rights are protected from expropriation depends upon the wording and definitions contained in the relevant investment treaty. On the whole, investment treaties often contain relevant broad definitions of ‘investment’ and tribunals applying such definitions have generally favoured a broad interpretation, incorporating contractual rights within the scope of the treaty’s protection. For instance, Article 1(6) of the 1995 Energy Charter Treaty defines “investment” as “every kind of asset, owned or controlled directly or indirectly by an investor and includes … any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law”. In Suez v Argentina, the tribunal noted that the right to a stream of revenue from a concession contract fell within the definition of investment under the three bilateral investment treaties relevant to the dispute (Argentina–France, Argentina–Spain and Argentina–UK) and that, as the economic value of the shares of the shareholders of the company would be directly affected by actions taken against its assets, the claimants had investments capable of protection from expropriation.3 Furthermore, the tribunal concluded that it could be inferred from the fact that the relevant definitions of investments included concessions conferred by law or contract that contractual rights in a concession were protected from expropriation. In the ICSID case Emmis v Hungary, the tribunal stated that “the loss of a right conferred by contract may be capable of giving rise to a claim of expropriation but only if it gives rise to an asset owned by the claimant to which a monetary value may be ascribed. The claimant must own the asset at the date of the alleged breach. It is the asset itself – the property interest of chose in action – and not its contractual source that is the subject of the expropriation claim. Contractual or other rights accorded to the investor under host state law that do not meet this test will not give rise to a claim of expropriation.”4 As explained in the previous paragraph of the same award, this implies that “the property right or asset must have vested (directly or indirectly) in the claimant for him to seek redress.” More recently, in paragraph 147 of the Award of 17 April 2015 rendered in the case Accession Mezzanine Capital L.P. and Danubius Kereskedöház Vagyonkezelö Zrt. v. Hungary, (ICSID Csse No ARB/12/3) the tribunal further developed that it is “precisely because property rights can be alienated or assigned that makes them susceptible to being appropriated or expropriated. What cannot, on the other hand, be appropriated or expropriated are personal rights because the right is not separable in law from the person who has it. A personal right cannot enter circulation in a market like a property right can.” Therefore, not all contractual rights are capable of being expropriated, only those giving rise to property rights. 9.9 Even if the treaty is silent on the scope of the property rights protected from expropriation, it is generally accepted that contractual rights are one of the categories of intangible rights that may be expropriated in breach of international investment law.5 9.10 Even if contractual rights are recognised and fall within the category of intangible property protected by the relevant investment treaty or international law, there remains a difficulty in defining when a breach of contract by a host state entails a claim under an investment treaty. When the state acts in a commercial capacity as a party to the contract

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must be distinguished from when it acts in its sovereign capacity, which implies the exercise of sovereign powers. As recognised by the tribunal in Siemens v Argentina ‘for the behaviour of the State as party to a contract to be considered a breach of an investment treaty, such behaviour must be beyond that which an ordinary contracting party could adopt and involve State interference with the operation of the contract’.6 9.11 It is important to recognise that although claims brought for breach of treaty obligations and claims for contract breaches may overlap, they are analytically different. A state may breach a contract without breaching a treaty.7 This was espoused by the committee in Vivendi v Argentine Republic who noted that:

whether there has been a breach of the BIT and whether there has been a breach of contract are different questions. Each of these claims will be determined by reference to its own proper or applicable law – in the case of the BIT, by international law; in the case of the Concession Contract, by the proper law of the contract.8

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