La representación indígena en el Congreso

(i) “Fair”, “Appropriate” and “Equitable” Compensation

USD 66m (as compared to USD 186m claimed) were awarded to Liamco for the premature termination of its oil concession by Libya.i^^ Arbitrator Mahmassani determined this sum by relying on the formula of “equitable compensation” because it seemed reasonable and just to adopt it.i25 Mahmassani’s decision is often cited as an authority for the proposition that compensation for expropriated assets should be “just” or “equitable” or “fair” or “appropriate”, but in any event less than f u ll. "'26 The supporters of this theory emphasise that such a flexible

123 ) Rood, “Compensation for Takeovers in Africa" (1977) 11 J.Int’I.L.&Econ. 521 at 535.

124 ) Liamco [1977] 62 ILR 141 at 218. In addition the company was awarded US D 13,882,677 for the loss of physical assets and USD 203,000 toward its arbitration costs plus 5% “compensatory indemnity" in lieu of interest on these sums.

125 ) Ibid., 210.

126 ) See: e.g., Asante, International Law and Foreign Investment: A Reappraisal, 603. The term “just" compensation is used in some domestic laws, such as in US law. In the domestic law context it usually means “full” compensation. See: Mendelson, “W hat Price Expropriation? Compensation for Expropriation: The Case Law” (1985) 79 AJIL 414 at 416.

approach allows an inquiry into all the relevant circumstances of a particular case,127

e.g.,

the

risks involved in the investment and the timing of the taking/^s Some writers maintain that the political stability of the host State and its capacity and willingness to pay should be relevant. 129

Otherwise the accepted goal of development of poor countries would be rendered pointless.''20

Finally, the conduct of foreign investors should matter. Bad business practices and “excess profits," for instance, may justify a reduction of compensation.Kuwait claimed in the

Aminoil

Casei32 that the damage caused by the company’s improper oil field practices should be set off from the compensation due to Aminoil.

Some GA resolutions press for “appropriate” compensation. Resolution 1803(XVII) on Permanent Sovereignty over Natural Resources is a well-known example.^^s The Charter of Economic Rights and Duties of States, by contrast, does not require any compensation.''^^ Sornarajah’s analysis of the former resolution reveals that “appropriate” compensation could range from full to no compensation. Partial compensation, however, is the generally accepted standard.135

127 ) van de Voorde, Belgian Bilateral Investment Treaties as a M eans for Promoting and Protecting Foreign Investments, 103-104.

128 ) Riad, Host Countries Perm anent Sovereignty over Natural Resources and Protection o f Foreign Investors, 84. 129 ) Kuhn, “Nationalization of Foreign-Owned Property and its Impact on International Law“ (1951) 45 AJIL 709 at 710 and Dawson and Weston, “’Prompt, Adequate and Effective’: A Universal Standard of Compensation?” (1962) 30 Ford.L.Rev. 727 at 754-755.

130 ) Sornarajah, The Pursuit o f Nationalized Property, 191.

131 ) Idem, The Intemational Law on Foreign Investment, 404-405 and 411 and Rood, Compensation for Takeovers in Africa, 531-532. Other writers achieve the sam e result by applying the “notion of equity”, particularly in cases of nationalisations. This concept balances the claims of the dispossessed investor with the profits and advantages he enjoyed prior to the taking. See: Francioni, “Compensation of Nationalisation of Foreign Property: The Borderland between Law and Equity” (1975) 24 ICLQ 255 at 278. The issue of “excess profits” first arose in the Chilean expropriations of the Kennecott Copper Corporation and the Anaconda Company in 1971. The Chilean military government maintained that excess profits in the total amount of USD 410m for Kennecott alone was to be deducted from the compensation due to the company. In 1974 the company and the government concluded a settlement agreem ent indemnifying Kennecott in the total amount of USD 68m. For more details on these takings, see: Steiner and Vagts, Transnational Legal Problems, 3^i ed., (Mineola, N.Y.: The Foundation Press Inc., 1986), 510.

132 ) [1982] 66 ILR 515 at 595-599. The tribunal, however, carefully avoided a ruling on this issue by arguing that bad oil field practices had not been proven.

133 ) G A Res. 1803(XVII), dated Decem ber 1 4 ,1 9 6 2 , Art. 4. 134 ) GA Res. 3281 (XXIX), dated Decem ber 1 2 ,1 9 7 4 , Art. 2(2)(c).

135 ) Sornarajah, The International Law on Foreign Investment, 406. He states that full compensation is only “appropriate” in cases where the foreign investor was “invited” by the host State for a project which could not have been completed without his investment, or if a small business is taken and the investor could not commence profits from his investment. Ibid., 408-409.

Finally, decisions of international tribunals seem to support the concept of “appropriate”, “fair” or “just” compensation. The PCIJ in its famous

obiter dictum

in the

Chorzôw Factory Case^^^

confirmed that "just” compensation needs to be paid in cases of lawful e x p r o p r ia tio n s .^ ^ / "Just”

compensation also was awarded in the

Norwegian Shipowners’ Claims^^^

“Appropriate” compensation was due in

A m in o il,

and “equitable” compensation had to be paid in

Liamco.^^^

(ii) The Hull Formula

A note written by US Secretary of State Cordell Hull on August 22,1938 to the Mexican Minister of Foreign Affairs was the origin of what became subsequently known as the Hull formula. It demands “prompt, adequate and effective” compensation for expropriated foreign property.141 Jurists interpreted this formula to mean that payment has to be made without undue delay, reflecting the real value of the expropriated investments at the time of the taking and be of practical use for the recipient,

i.e.,

freely realisable and transferable in a convertible c u rre n c y .

Writers favouring the Hull formula argue that “flexible" compensation not based on the full value of the assets taken is inherently arbitrary and c a p r i c i o u s . ''^ ^ |t remains, for example, completely unclear how the “equitable” considerations of arbitrator Mahmassani in

Liamco^^^

resulted in the amount of USD 66m for the premature termination of the company's oil concession. Promoters of the Hull Formula further state that taking account of factors such as “excess profits” is rather unprincipled. If a foreign investor conducted a business in the host State in accordance with the domestic laws, a subsequent reduction of his compensation on the basis of “excess profits” would penalise his success.''^^ Commentators preferring the outlined “flexible" standard of

^36 ) (Merits) [1928] P.C.I.J., Series A, No.17. This case involved an unlawful individual expropriation by Poland of German property, taken in breach of a treaty. The PCIJ held that in the event of such an unlawful expropriation restitution in kind was the proper remedy.

3 7 ) / M , 47-48.

38 ) [ 1 922] 1 RIAA 307 at 338-340. 39) [1982] 66 ILR 515 at 601-602. 40) [1977] 62 ILR 141 at 210.

41 ) Hackworth, Digest o f International Law, 658.

42 ) Com eaux and Kinsella, Protecting Foreign Investment under Intem ational Law: Legal Aspects o f Political Risk,

82 and Peters, Investment Risk and Trust: The Role o f International Law, 144.

43 ) Clagett, Just Compensation in Intem ational Law: The Issues before the Iran-United States Claims Tribunal, 86. 44) [1977] 62 ILR 141.

45 ) Clagett, Just Compensation in International Law: The Issues before the Iran-United States Claims Tribunal, 91.

compensation are also accused of having a stereotyped view of foreign investors. They traditionally focus on large MNCs, such as big oil companies, which have substantial market control and exploit host States for the profit of their shareholders. These authors ignore the fact that expropriations equally affect small investors.i^e

(ill) The Compromise in Guideline IV

Traditionally, the Hull formula has been supported by Western writers^^^ and developed States.^48 Developing countries have favoured the flexible standard of “just”, “appropriate” or “fair” compensation.149 The Guidelines aspire to reconcile these opposing positions. They declare that compensation needs to be “appropriate”,i5o /.e., “prompt, adequate and effective”.i5i The report accompanying the Guidelines attempts to justify this wording. It explains that the Hull formula “specifies” the general term of “appropriate” compensation, and that "normally” compensation will be deemed “appropriate” if it is “prompt, adequate and effective”. 1^2

However, the Guidelines and the accompanying report cause confusion by attempting to merge two different concepts. Guideline IV(1-2) is therefore not a reliable foundation for a treaty ^"6 ) Lillich, “The Valuation of Nationalized Property in International Law: Toward a Consensus or More ‘Rich Chaos’?” in Lillich (ed.), The Valuation o f Nationalized Property in Intem ational Law, Vol. Ill, (Charlottesville: University Press of Virginia, 1975) 183 at 200.

^47 ) See: e.g., Robinson, Expropriation in the Restatem ent (Revised), 176-178, Norton, “Back to the Future: Expropriation and the Energy Charter Treaty” in W alde (ed.). The Energy Charter Treaty: An East-W est G atew ay for Investment and Trade (London, The Hague, Boston: Kluwer Law International, 1996) 365 at 380, idem, “A Law of the Future or a Law of the Past? Modern Tribunals and the International Law of Expropriation” (1991) 85 AJIL 474 at 488-492 and Domke, Foreign Nationalizations: Some Aspects o f Contemporary International Law, 604-608.

I'*® ) The Hull formula is incorporated in many BITs concluded by developed States. See: e.g., Treaty between the US and Jordan Concerning the Encouragement and Reciprocal Protection of Investment, dated July 2, 1997, Art. 111(1) and Agreem ent between Sweden and Yemen for the Promotion and Protection of Investments, dated October 29, 1983, Art. 5(1). More than 50% of the BITs surveyed in preparation of the Guidelines contained the Hull formula. See: Khalil, Treatment o f Foreign Investment in Bilaterai Investment Treaties, 256. See also: American Law Institute,

Restatem ent of the Law (Third): The Foreign Relations Law o f the United States, Vol. 2 ,1 9 7 which does not explicitly state that compensation needs to be “prompt, adequate and effective”, but describes this standard in other words. Compare: American Law Institute, Restatement o f the Law (Second): The Foreign Relations Law o f the United States

(St. Paul, Minnesota: American Law Institute Publishers, 1965), 563 adopting the traditional Hull formula.

149 ) Asante, International Law and Foreign investment: A Reappraisal, 598-602, Sornarajah, The Intem ational Law on Foreign Investment, 402-411 and GA Res. 3281 (XXIX) on the Charter of Economic Rights and Duties of States, dated Decem ber 1 2 ,1 9 7 4 adopted by a majority of 120 States. Six major capital exporting countries (the US, the UK, Belgium, Denmark, Luxembourg and the Federal Republic of Germany) voted against it.

150 ) Guideline IV(1). 151 ) Guideline IV(2).

152 ) The World Bank, Legal Framework for the Treatment o f Foreign Investment, Vol. II - Guidelines, Report to the Developing Committee and Guideiines on the Treatment o f Foreign Direct Investment, 25. Western countries, however, have liked the term “specifying” in the report, as they could argue that compensation is usually only “appropriate” if it is in fact “prompt, adequate and effective”.

provision. The Convention should instead secure that in cases of individual e x p ro p ria tio n s ^ ^ ^

foreign investors are compensated according to the Hull formula. That rule, however, is without prejudice to the instrument’s general provisions on monetary transfers. Such a qualification is essential as it ensures that the host State can defer payment of compensation in cases of foreign exchange s trin g e n c ie s .''^ ^ The approach of the Guidelines, by contrast, has significant

deficiencies.

1.) The meaning of Guideline IV(1) and IV(2) is not clear. First, neither the Guidelines nor the accompanying report describe in which circumstances "appropriate” compensation may be less than “prompt, adequate and effective”. Secondly, the standard of “appropriate” compensation is in itself indeterminate. To agree that compensation needs to be “appropriate” is to agree to nothing.155 Even terms such as “fair” or “just” have more substance.''56

2.) State practice does not support the concept of “appropriate” compensation without more precision. Numerous GA resolutions often cited as evidence for this standard are not conclusive. GA resolution 1803(XVII) on Permanent Sovereignty over Natural Resources was passed by a 87 votes to 2 with 12 abstentions. Many developing countries and industrialised States voted in its favour. The resolution was therefore subsequently regarded as reflecting customary international law.''57 in its Art. 4 it mentions “appropriate” compensation. However, States interpreted this term differently.''58 The US affirmed that it understood this article to mean “prompt, adequate and effective” compensation.159 Representatives of the developing world equated it with their flexible concept of “appropriate" compensation."'60 The Charter of Economic

153 ) For nationalisations, see infra: chapter B IV 3b.

154 ) As outlined in chapter B III 2b, the host State should have the right to defer payment of compensation for expropriated property in exceptional circumstances of foreign exchange stringencies. The Convention should make it clear in its provision on expropriation that this right takes prejudice over the rule set forth in the Hull formula requiring payment to be “prompt”. The Guidelines achieve the same result by incorporating a separate provision in Guideline IV(8) stating that compensation under the Hull formula is still deemed to be “prompt” even if payment is in exceptional circumstances of foreign exchange stringencies deferred for up to five years.

155 ) Norton, Back to the Future: Expropriation under the Energy Charter Treaty, 380. 156 ) Peters, Investment Risk and Trust: The Role o f International Law, 144.

157 ) See: e.g., the analysis of this and other GA resolutions by arbitrator Dupuy in Texaco [1977] 53 ILR 389 at 486- 492 and Sedco Inc. vs. National Iranian Oil Company and Iran (Interlocutory Award of March 2 7 ,1 9 8 6 ) [1986] 84 ILR 521 at 526.

158 ) Boas, "The O .E.C .D . Draft Convention on the Protection of Foreign Property” (1963-64) 1 Com m .Mkt.L.Rev. 265 at 280-281.

159 ) In fact the US proposed to include the traditional Hull formula in GA Res. 1803(XVII), but subsequently withdrew its suggested amendment. See: Schwebel, “The Story of the U.N.'s Declaration on Permanent Sovereignty over Natural Resources” (1963) 49 ABAJ 463 at 465-466.

160 ) See: e.g., Sornarajah, The InternationalLaw on Foreign Investment, 405.

Rights and Duties alludes in its Art. 2(2)(c) to the term “appropriate compensation.” This resolution, however, does not represent a consensus on customary intemational law, because major industrialised countries voted against it^^i or abstained.1^2

3.) Case law does not reinforce a “flexible” standard of compensation. The interpretation of relevant decisions has caused some disagreement amongst commentators. Sometimes writers tend to stick too much to words, rather than interpreting the

meaning

of a given award. The strongest argument in favour of a flexible standard of compensation is that none of the major cases in fact adopts the Hull formula.^^s The earlier crucial decisions, such as the

Chorzôw

Factory

Case^s^ and the

Norwegian Shipowners’ Claims^^^

were made in 1928 and 1922. The

Hull formula was first introduced in 1938.166 Clearly, cases decided ten or sixteen years prior to that do not employ the exact wording of “prompt, adequate and effective” compensation. However, these cases nevertheless support the “adequate” component of the Hull formula. Compensation is "adequate” if it amounts to the real value of the assets taken. The PCIJ in its

obiter dictum

in the

Chorzôw Factory

Case explicitly confirmed that “the just price of what was

expropriated” reflecting the “value of the undertaking” needs to be paid by the expropriating State. 167 In the

Norwegian Shipowners’ Claims

the Permanent Court of Arbitration (PCA) emphasised that “just compensation implies a complete restitution of the

status quo

ante”. 168 It is

hardly convincing that these phrases in fact support a flexible standard of compensation which would amount to less than full compensation.i69 The same confusion of substance with semantics

61 ) The Federal Republic of Germany, the UK, the US, Belgium, Luxembourg and Denmark voted against this resolution.

62 ) For a detailed analysis of this resolution, see: arbitrator Dupuy in Texaco [1977] 53 ILR 3 89 at 488-493, where he states that Art. 2 “is a political rather than legal declaration, concerned with the ideological strategy of development and, as such, supported only by the non-industrialised States". Ibid., 492. Also: Clagett and Poneman, The Treatm ent of Economic Injury to Aliens in the Revised Restatement of Foreign Relations Law” (1988) 22 Int’l. Lawyer 35 at 37 and Robinson, Expropriation in the Restatem ent (Revised), 176-177.

63 ) Schachter, Compensation for Expropriation, 122-123, idem, “Compensation Cases - Leading and Misleading" 1985) 79 AJIL 420 and Asante, Intemational Law and Foreign Investment: A Reappraisal, 603.

64 ) (Merits) [1928] P.C.I.J., Series A, No. 17. 65 ) [ 1 922] 1 RIAA 307.

66 ) Hackworth, Digest o f International Law, 658. 67 ) (Merits) [1928] P.C.I.J., Series A, No. 1 7 ,4 7 .

68 ) [ 1 922] 1 RIAA 307 at 338.

69 ) So also: Mendelson, What Price Expropriation? Compensation for Expropriation: The Case Law, 415-416 and

dem , “Note to the Editor in C h ie f (1985) 79 AJIL 1041-1042. See also: Gann, “Compensation Standard for Expropriation” (1985) 23 Col.J.Transnat’I.L. 615 at 651.

occurs in recent casesJ^o in

Aminoil

the tribunal awarded “appropriate” compensation, which corresponded to the depreciated replacement value of the company’s tangible assets, including indemnification for the premature termination of its concession agreement. This was deemed to reflect Aminoil’s “legitimate expectations” plus interest.i^^ Finally, the Iran-US Claims T rib u n a h ^ z

often corroborated the standard of "prompt, adequate and effective” compensation under both the Treaty of Amity^^^ and customary international law.^^^

4.) BIT practice and other regional and multilateral treaties on FDI, such as NAFTA^^s and the Energy Charter Treaty,i76 indicate that States including developing countries are willing to accept the Hull formula.i^^ The 1992/93 World Bank survey of BITs revealed that more than 50% of the BITs analysed adopted the standard of "prompt, adequate and effective” compensation.i^s Whether this extensive treaty practice reflects customary intemational law is an ongoing controversy that has already been briefly m entioned.Even if one concludes that the large number of BITs and other investment treaties requiring full compensation are not a restatement of customary international law, their significance in showing what States are willing to agree to should not be underestimated. A multilateral investment agreement that ignores this trend in modern treaty practice would hardly be acceptable to States that have incorporated the Hull formula in BITs they have concluded.

^^0 ) The difficulty that words may sometimes jeopardise meaning is not unique to the interpretation of judicial decisions or arbitral awards. It equally occurs in interpreting treaties. For example, the North American Free Trade Agreement, Art. 1110(1) does not contain a provision that compensation needs to be “prompt, adequate and effective”. It describes the Hull formula in other words. The reason for the absence of the exact wording of the Hull formula was the traditional Mexican “sensitivity" to this language. See; Levy, “NA FTA’s Provision for Compensation in the Event of Expropriation: A Reassessment of the ‘Prompt’, ‘Adequate’ and ‘Effective’ Standard" (1995) 31 Stan.J.Int’I.L. 423 at 445.

171) [1982] 66 ILR 515 at 613-614.

172 ) For a summary of the decisions of the tribunal on compensation see: Pellonpaa and Fitzmaurice, Taking o f Property in the Practice o f the Iran-United States Claims Tribunal, 115-175.

173 ) Treaty of Amity, Economic Relations and Consular Rights between Iran and the US, dated August 1 5 ,1 9 5 5 , Art. IV(2). See: e.g., Phillips Petroleum Company Iran vs. Iran and National Iranian Oil Company [1989] I, Vol. 21, Iran- US CTR 79 at 118.

174 ) See: e.g., Sedco Inc. vs. National Iranian Oil Company and Iran (Interlocutory Award of March 2 7 ,1 9 8 6 ) [1986] 84 ILR 521 at 525 and Tippetts, Abbett, McCarthy, Stratton vs. Iran, TAM S-AFFA Consulting Engineers o f Iran, Civil Aviation Organization, Plan and Budget Organization, Iranian Air Force, Ministry o f Defense, Bank Melli, Bank Sakhteman and Mercantile Bank o f Iran and Holland [1984] II, Vol. 6, Iran-US C TR 219 at 225.

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