An international arbitral tribunal held in Tidewater v. Venezuela (ICSID Case No. ARB/10/5) that an expropriation wanting only a determination of compensation by an international tribunal is not to be treated as an illegal expropriation. Consequently, the tribunal determined the fair market value of the investments based on the discounted cash flow method, rather than awarding a sum corresponding to the value which restitution in kind would bear.
International law, including bilateral investment treaties, does not prohibit the State taking property by way of nationalisation or expropriation. Rather international law permits such a taking, but generally only if the following conditions are met: (1) the expropriation is for a public purpose, (2) it is made according to due process of law, (3) on a non-discriminatory basis and (4) against prompt, adequate and effective compensation. If such conditions are met, the expropriation is not in breach of international law.
The distinction between lawful and unlawful expropriation matters in the determination of the amount of the compensation. In the Tidewater Tribunal’s words “the essential difference between the two is that compensation for a lawful expropriation is fair compensation represented by the value of the undertaking at the moment of dispossession and reparation in case of unlawful expropriation is restitution in kind or its monetary equivalent.” As compensation for unlawful expropriation is intended to wipe out the consequences of the unlawful act, in their valuation exercise tribunals can account for an increase in value of the assets between the time of the expropriation and the date of the award.
Most expropriation claims turn on the question whether a contested State measure is expropriatory at all. Cases where expropriation is acknowledged by the State are rare. In Tidewater v. Venezuela the State acknowledged the expropriation by law of the foreign investor’s assets invested in its oil service activities around Lake Maracaibo in Venezuela. However, the parties were unable to agree on the basis or the process by which the compensation would be calculated and paid. The investor submitted that the Venezuelan law on the basis of which its assets were seized was not compliant with the compensation standard under the applicable bilateral investment treaty. The Venezuelan law required the State to pay compensation only on a book-value basis, without taking into account lost profits or indirect damages. The treaty required the State to pay compensation which amounts to the market value of the investment expropriated, calculated before the expropriation (or when the impending expropriation became public knowledge). The tribunal stated that it was not bound by the limits on valuation imposed by Venezuelan law. However, the tribunal did not find that such limits made the expropriation as a whole illegal. The tribunal distinguished the case from cases where the State took the assets without any offer of compensation or where the tribunal found that the expropriation violated the four conditions set out in the treaty.
So long as the parties mandated an international tribunal to determine only the compensation due for expropriation, and not the other conditions for a lawful expropriation, it is unlikely that a tribunal will find that an unlawful expropriation has occurred, particularly in a situation where the State did not refuse to pay any compensation to the expropriated foreign investor.
Further reading: (1) Tidewater Investment SRL (2) Tidewater Caribe, C.A. v The Bolivarian Republic of Venezuela (ICSID Case No. ARB/10/5), Award, 13 March 2015, available here.