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Nationalisation programmes throughout the 20*^ century, such as the Soviet takings after the Russian Revolution, the Mexican agrarian and oil nationalisations, and countless post-World- War-ll social reform programmes in the States of the former Eastern European bloc gave rise to the question of whether in these cases the amount of compensation payable to foreign investors should be less than "prompt, adequate and effective”.''®^

(i) Nationalisations and Partial Compensation

A considerable number of commentators maintain that there is no obligation of a State nationalising foreign assets to pay compensation according to the Hull formula. These authorities argue that many developing countries most likely in need of social and economic reforms may not have enough financial resources to pay all foreign investors fully upon the nationalisation of a sector of their economy."'®® Also, the financial burden is in cases of large-scale economic reforms much higher than in the event of an individual expropriation. This fact justifies the view that the capacity of a country to pay compensation should be taken into account."'®® In fact, a rule requiring full compensation would render large-scale economic reforms in some States impossible."'®^

183 ) For more details on fair and equitable treatment, see supra: chapter B III 1c.

184 ) Other nationalisations were, e.g., the takings of Dutch property by Indonesia in 1958, the Castro-seizures in Cuba and the land reforms in some successor States to Austria-Hungary. For a list of major nationalisations in the 20'*' century, see: Bishop, General Course o f Public Law, 406.

185 ) Dolzer, “New Foundations of the Law of Expropriation of Alien Property” (1981) 75 AJIL 553 at 583 arguing that the economic situation of numerous developing countries will m ake full payment of compensation the exception rather than the rule.

186 ) Boas, The O.E.C.D. Draft Convention on the Protection of Foreign Property, 280.

187 ) Kuhn, Nationalization o f Foreign-Owned Property and its im pact on international Law, 711 and Kronfol,

Protection o f Foreign Investment: A Study in International Law, 112. See also: Sohn and Baxter, Responsibility o f Sates for the Injuries to the Economic Interests o f Aliens, 559-560. The American Law Institute, Restatem ent of the Law (Third): The Foreign Relations Law o f the United States, Vol. 2 ,1 9 9 lists narrow scenarios, such as a taking of alien property during war or similar exigency, in which the Hull formula should not be applicable. Other authorities want to allow partial compensation only if the investor has already recovered his initial investment. See: Bauman, “An International Standard of Partial Compensation Upon the Expropriation of Alien’s Property” (1987) 19 Case W esLRes.J.Int’I.L. 103 at 110.

Sornarajah emphasises that in cases of nationalisations it is crucial to reconcile the principle of respect for alien property with the interest of development and economic change in the host StateJ88 state practice confirms this in the many lump-sum settlement agreements concluded between governmentsJ^G For instance, after World War II and Communist take-overs throughout Eastern Europe, the UK negotiated lump sum agreements with Argentina, Mexico, Poland and a number of other countries. Compensation provided for in these treaties amounted to approximately 30-60% of the British claims.i^o In fact, in most of the 20*^ century settlement agreements, payment was rarely “prompt, adequate and effective".

No international tribunal has yet finally ruled on the standard of compensation payable to foreign investors in cases of large-scale economic and social reforms in host S ta te s .T h e Iran- US Claims Tribunal has indicated in one case that under customary international law the standard of “prompt, adequate and effective” compensation may not apply to nationalisations.^^s //\//\

corp

vs.

/ran^94 contains

obiter dictum^^^

that: "... in the event of large-scale nationalisations of a lawful character, international law has undergone a gradual reappraisal, the effect of which may be to undermine the doctrinal value of the ‘full’ or ‘adequate’ (when used as identical to ‘full’) compensation standard.”^96

188 ) Sornarajah, The Pursuit o f Nationalized Property, 192.

189 ) Dawson and Weston, Prompt, Adequate and Effective’: A Universal Standard o f Compensation?, 749.

189 ) Kronfol, Protection o f Foreign investment: A Study in International Law, 112. Bowett estimates that the post 1945 lump sum settlement agreements provided for compensation ranging from 10-90% of the asset value. See: Bowett, State Contracts with Aliens: Contemporary Developments on Compensation for Termination or Breach, 65. 181 ) Garcia Amador, “A Basic Dispute: Conflicting Views on Expropriation” in Norton (ed.). Public Intemational Law and the Future World Order (Littleton, Colorado: Rothman & Co., 1987) 7-1 at 7-9 particularly on the requirements of “prompt” and “effective” payment.

182 ) A German Court of Appeal, however, dealt with the issues in N.V. Verenigde Deli-Maatschappijen and N.V. Senem bah Maatschappij vs. Deutsch-lndonesische Tabak-Handelsgesellschaft m.b.H. [1959] 28 ILR 16 and stated in dicta that in cases of large scale nationalisations and individual expropriations different standards of compensation apply. In the former category compensation only has to be paid out of the future proceeds of the enterprises nationalised. Ibid., 35.

183 ) For an analysis of the case, see: Pellonpaa and Fitzmaurice, Taking o f Property in the Practice o f the Iran-United States Claims Tribunal, 118-119, Brower, The Iran-United States Claims Tribunal {^ 9 % ) V Recueil des Cours 133 at 342-343 and Amerasinghe “Issues of Compensation for the Taking of Alien Property in the Light of Recent Cases and Practice” (1992) 41 ICLQ 22 at 43-44.

184) [1985] 75 ILR 596.

185 ) Ibid., 602. The tribunal held that the present case has to be decided according to the Treaty of Amity, which forms lex specialis to customary international law.

186 ) US Judge Holtzmann, however, rejected that any “reappraisal" of customary international law has led to a change in the standard of compensation. Ibid., 625.

(ii) Nationalisations and the Hull Formula

The policy arguments outlined at the beginning of the previous section, pleading for less than “prompt, adequate and effective” compensation for nationalised investments, are not convincing. They can be easily refuted by other policy grounds. For instance, partial compensation for nationalised investments really means that foreign investors bear the costs of a domestic reform programme. This is particularly intolerable if the venture taken was a going concern, which is subsequently operated by the host State for its own p ro fit.A ls o , aliens have usually not contributed to creating the problems the nationalisation is supposed to solve. They have no influence in the decision-making process on the reform programme,^^® and they are unlikely to enjoy whatever benefits may be derived from the n a tio n a lis a tio n .

The limited financial capacity of some States is not a justification for less than full compensation because States may postpone payment in accord with the Convention’s provisions on monetary transfers,

e.g.,

in cases of balance of payment problems.200 If a State is still too poor

to pay compensation as set forth by the treaty’s transfer provisions, it can refrain from the measure in question.201 Partial compensation for nationalised property would penalise foreign

investors in cases where the host State wishes to carry out a reform project, for which it does not intend to pay the full p r ic e.202 Compensation may then be considerably lower than the host

) Clagett, Just Compensation in International Law: The Issues before the Iran-United States Claims Tribunal, 81 and Domke, Foreign Nationalizations: Some Aspects o f Contemporary I ntem ationalLaw , 607.

198 ) Meessen, Domestic Law Concepts in International Expropriation Law, 167, Kissam and Leach, Sovereign Expropriation o f Property and Abrogation o f Concession Contracts, 189 and Verdoss, Die Nationalisierung niederlandischer Unternehmungen in Indonésien im Lichte des Volkerrechts, 287. See also: the decision of the European Court of Human Rights in Lithgow and Others [1986] 75 ILR 439 at 484, where the court held that compensation payable in cases of large scale economic reforms may very well differ between nationals and non­ nationals. The latter cannot influence the domestic legislation and it is legitimate to require nationals to bear the greater burden of such a reform. The court also held that the reference to “general principles of international law” in Art. 1(1), in the second sentence of the First Additional Protocol to the European Convention on Human Rights, is not applicable to nationals, and that governments have a "margin of appreciation” in setting the amount of compensation.

Ibid, 483-485 and 486-487. The consequence of this ruling is that governments may in fact enjoy a wide margin of discretion to fix compensation for nationals in cases of large-scale economic reforms without fearing much interference from the European Court of Human Rights. See: Mendelson, “The United Kingdom Nationalization Cases and the European Convention on Human Rights” (1986) 57 BYIL 33 at 74.

199 ) Kissam and Leach, Sovereign Expropriation o f Property and Abrogation o f Concession Contracts, 189.

200 ) Chapter B III 2.

291 ) See also: Clagett, Just Compensation in International Law: The Issues before the Iran-United States Claims Tribunal, 81 and Kissam and Leach, Sovereign Expropriation o f Property and Abrogation o f Concession Contracts,

189.

292 ) Clagett and Poneman, The Treatment o f Economic Injury to Aliens in the Revised Restatem ent o f Foreign Relations Law, 45. It is also not reasonable, as suggested by some commentators, that the entire history of an investment project and all the relevant economic circumstances should be considered to determine the amount of compensation due. See: Penrose, Joffê and Stevens, “Nationalization of Foreign-owned Property for a Public Purpose: An Economic Perspective on Appropriate Compensation” (1992) 55 Mod.L.R. 351 at 363.

State’s financial resources would a llo w .2 0 3 in reality, measures called “nationalisation” or “social

and economic reform” often have the real purpose of ending foreign economic domination in a given country.204

The point that State practice, as evidenced by numerous post World War II lump sum settlement agreements, supports a standard of compensation for nationalised assets which is less than full, is not convincing either. These agreements hardly reflect customary international law.205 In practice. States have settled for less than they think they are entitled to because otherwise they would have ended up with nothing.206 Recent treaties, such as most BITs,207

NAFTA208 and the Energy Charter Treaty^os do not stipulate different standards of compensation for individual expropriations and nationalisations. They usually apply the Hull formula to both forms of taking. Even BITs concluded between developing countries insist upon “prompt, adequate and effective” compensation.210

Finally, no arbitral award or judicial decision exists confirming that an investor by accepting less than full compensation acknowledges a legal right of the nationalising State to pay only partial compensation.211 The outlined

dictum

in

INA Corp. vs. Iran^^^

is not a definite

authority for the proposition that less than full compensation should be paid by a State nationalising foreign investments. The case law of the Iran-US Claims Tribunal is inconclusive on

203 ) Friedman, Expropriations in intemational Law, 207.

204 ) Alenfeld, Die Investitionsforderungsvertrage der Bundesrepublik Deutschland, 152. Bauman, however, argues that in cases of nationalisations aimed at ending foreign dominance, partial compensation is legitimate. See; Bauman, An Intemational Standard o f Partial Compensation Upon the Expropriation o f Alien’s Pmperty, 110. 205 ) Mendelson, The Formation o f Customary International Law (1998) 272 Recueil des Cours 155 at 301.

206 ) Ibid. and Aminoil [1982] 66 ILR 519 at 605-607 where the tribunal rejected the view advanced by Kuwait that transnational agreements concluded between oil companies and States in the 1970s on the compensation payable by the latter to the former for expropriated investments, settling for less than full value on the basis of the net book value, have become customary international law in the form of lex petrolea, i.e., a law unique to the oil industry. The tribunal argued that reasons, such as pressure of very strong economic and political constraints caused the oil companies to agree to these deals. See also: Amoco [1987] 83 ILR 501 at 585.

207 ) See: e.g.. Agreem ent between Australia and China on the Reciprocal Encouragement and Protection of Investments, dated July 11, 1988, Art. VI11(1) and Treaty between the US and the Russian Federation Concerning the Encouragement and Reciprocal Protection of Investment, dated June 1 7 ,1 9 9 2 , Art. 111(1).

208 ) North American Free Trade Agreement, Art. 1110. 209 ) Energy Charter Treaty, Art. 13.

210 ) See: e.g.. Agreem ent between Egypt and Turkmenistan Concerning the Promotion and Reciprocal Protection of Investments, dated May 23, 1995, Art. 5 and Agreement between the Kyrgyz Republic and Pakistan on the Reciprocal Promotion and Protection of Investments, dated August 2 3 ,1 9 9 5 , Art. 4.

211 ) McNair, The Seizure o f Property and Enterprises in Indonesia, 251.

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