Richa Gunawat (Research Intern)
Under international investment law, the term 'expropriation' is defined as the formal withdrawal of property rights for the benefit of the state or private persons designated by the state. More simply, it can be described as the act of taking any private property for public use or the interest of the public. For instance, the government taking over any private neighbourhood to expand the railroad line. The term originally applied to any compulsory deprivation of property, specifically by the public agency, but now pertains primarily to government takings where the parties whose proprietary rights are deprived away from them are compensated.
Expropriation can be of two types: (a) Direct Expropriation; (b) Indirect Expropriation.
Indirect Expropriation occurs when states take effective control off, or otherwise interfere with the utilization, enjoyment or benefit of, an investment, strongly depreciating its economic value, even without an immediate taking of property. But there is no universally accepted definition for this and is understood differently on a case to case basis as well as the language of the treaties and interpretation of dispute settlement authorities.
The essential ingredients of indirect expropriation to be legitimate are:
- It must be in the public interest,
- It must not be discriminatory,
- It must be in accordance with the law,
- It must be against immediate and adequate compensation.
The concept of indirect expropriation emerged from various sources. Viz., precedents of international tribunals, treaties, attempts to codify it, and the theory provided by Richard Epstein.
As discussed above the term expropriation is used when private property is taken by the government for the benefit of the public and under such usage, the property is acquired under the right of eminent domain which is based on two maxims (1):
- Salus Populi supreme lex esto (welfare of the people if the paramount law)
- necessita public major est quan (public necessity is greater than the private necessity)
Moreover, all things considered, expropriation suggests legitimate procedure and just consideration for property taken for public use, with judicial review as a solution for inadequate compensation. Property is taken through judgment procedures in which the owners can challenge the authority on the legal procedure and compensation. Eminent Domain is commonly understood as the power of government to exercise overall land within its territory for the public purpose. But what constitutes public purpose is wide open to interpretation and use.
Furthermore, expropriation if met with certain conditions was never prohibited under public international law. The issue of 'adequate compensation' was tabled and discussed for the long term as the expression 'adequate compensation' has not been defined under the law and would subject to judicial review. Hence, what would be considered as adequate depends solely upon facts and circumstances of each case.
In addition to that, the property owner's right (to be adequately compensated) is protected under various international laws and also has constitutional protection in many jurisdictions. Most of the nations except those communist countries have recognized the right to private property I.e. it's an inherent right of a person that he will not be deprived of his property except through the due process of law, which is conflicts with the right of the state to acquire property under the doctrine of eminent domain. Both rights exist in a parallel way and need to be sorted in favour of citizens by putting limitations on the power of eminent domain.
There are various name for the same concept, Eminent Domain (the United States, the Philippines, and India), Necessary buy/Compulsory purchase (United Kingdom, New Zealand, and Ireland), Resumption (Hong Kong), resumption/compulsory acquisition/ obligatory procurement (Australia), expropriation (South Africa, Canada). However, this power can be delegated by the government to appropriate authorities such as municipalities or corporations. The expression eminent domain is now a well-accepted principle in almost all important countries (2).
This power of eminent domain can be exercised by the states without the necessity of the owners' consent and depends on the superior domain of the state overall the property within its territory. And the only limitation which exists for this power is the requirement of just compensation. In the Indian context, this power has emerged for the Constitution of India. Under entry 42 list III of the seventh schedule, both sate and union government has the power to enact laws relating to the acquisition of property. Moreover, the use of this doctrine for the acquisition of land is also justified when the purpose for the public benefit can only be served by a specific piece of land, with no substitute in existence. Earlier the constitution under Article 19 (1) (f), the right to private property was considered as a fundamental right of an individual and under Article 31, some limitations were provided against the state. But later the Articles were revoked by the forty-fourth amendment and Article 300A was embedded. This step was taken to balance the sovereignty of the nation.
In the United States, the Fifth Amendment provides that the government may only exercise this power if they provide just compensation to the owners of the property. James Madison who drafted the first language of the Public Use clause thought that if the power of government for taking away the owner property is left unrestricted then it could be easily be misused to infringe private property rights. As a result, the Madison proposal was adopted by the drafters of the Bill of Rights, as a part of the Fifth Amendment in America which limits the power of the doctrine of eminent domain. In Kohl v. the United States (3), the Supreme Court held that the government can exercise the power of eminent domain if it provides just compensation to the owner of the property. Further, the government must provide the property owner with just compensation even if the area is small and its utilization does not affect the economic rights of the owner (4). Also, the property must be used for public benefit only, and the general benefit which the society would enjoy form the development is adequate to qualify as 'public use’ (5).
In the United Kingdom, there is parliamentary supremacy meaning when parliament orders the compulsory acquisition I.e. expropriation or Eminent Domain, of private property, then the adequate compensation is always intended. However, these presumptions of laws have not been called into operation, as there are statues which provided for the compensations.
Further, the subject of what comprises just and satisfactory compensation is controlled by various factors, however, the most widely recognized standard in both Britain and the United States is what might be compared to the proprietor's monetary loss.
This doctrine is subject to certain drawbacks. Over time, the outer beauty of any city is of paramount importance and to achieve that big corporation and municipalities tries to buy private land of citizens. This lures other nations or cities or big firms to revive their network with them to incorporate the interests of enormous business. For instance, in 2000 Pfizer took away to the home of poor people in New London to manufacture an exploration office.
People often own property in different countries and each country has its distinctive laws about how the doctrine functions. This can make a difference since one country does not allow another country to interfere in its matter as well as there are rights that exist in one nation but not in other. This leads to much bigger chaos. In addition to the doctrine of eminent domain, there exists the principle of inverse condemnation, where the owner of the property challenges the authority when the procedure of eminent domain is not followed by a due procedure of law. In other words, where the authorities being it any legislatures or any private business organization has taken any property or harmed it and had neglected to compensate the owner - the owner in such a case can sue the administration and seek judicial remedies.
Furthermore, there are certain factors which are to be considered in determining the best utilization of the property which are as follows:
- demand in market
- Closeness to zones previously created in a perfect way with the proposed use
- Area's economic development
- Explicit plans of organizations and people
- Actions previously were taken to create land for that utilization
- Scarcity of land accessible for that utilization
- Absence of offers to purchase property made by purchasers who have put it to the utilization asked
- Negotiations with purchasers intrigued by property taken for the specific use
- The utilization to which the property is being put at the hour of the taking
The scope of protection has been transferred from direct to indirect expropriation, whether total or partial. Protection from indirect expropriation may be understood as the entitlement of a foreign investor to compensation for economic loss caused by a governmental action interfering with his property rights to diminish the value of or revenue from his investment. The "new" protection against indirect expropriation has become prominent worldwide with the lawsuits filed by investors against the government under Chapter 11 of NAFTA. However, the concept of indirect expropriation has developed though various important judgments since 1838. Indirect expropriation was included expressly in the US Bilateral Investment Treaties Program, 1980 & the Free Trade Agreement of Canada and the United States, 1988. The radical theory of Richard A. Epstein of partial takings had important relevance in introducing the term in Chapter 11 of NAFTA and approach by tribunals decking lawsuits. Thus, it may be said that NAFTA includes protection against indirect expropriation with a wider scope.
The protection against indirect expropriation provides an opportunity for the investors to challenge regulatory activities of states in areas of public interest such as human rights, environment, macroeconomic policies, labour, and tax laws. In recent cases, corporations have pointed out indirect expropriation with respect to the banning of harmful commercial substances, land distribution under radical equality programs, environmental regulations, or denial by a local municipality of permission to build. However, it remains unclear that which regulatory policies would constitute an indirect expropriation and where the state has to pay compensation and the distinction depends upon facts and circumstances of each case.
FTAs with BIT- Like provisions and BITs encroach on the sovereignty of states especially in cases of developing countries, in which they can challenge internal public policies. States have to be prudent and they should negotiate BITs carefully.
It is high time for international communities to take reformative steps with respect to the current system for the protection of international investments. This may help to even u the unequal bargaining positions of developing and developed nations when negotiating BITs. And most importantly, would strike a balance between compensable takings and legitimate governmental regulation in the public interest.
As discussed above the term 'Expropriation' is not just simply taking away owner's property by the government but, it is directed towards specific governmental objectives for public benefit or sometimes for public safety. But this expression is nowhere defined expressively, which leaves the term with wide and vague understanding and is considered as of arbitrary nature and its meaning is subject to judicial interpretation. However, the term indirect expropriation is explicitly mentioned under chapter 11 of NAFTA but its meaning is not yet defined which leads to more vagueness. And the problem of judicial interpretation remains. Furthermore, according to BITs, the bargaining power of developed nations differs from the developing ones which creates a problem for determining 'what constitutes a public purpose?' and 'which public purpose is valid and which is not?'. Also, indirect expropriation whether at the national or international level directly infringes sovereignty of the states. This calls for the need for proper and strict guidelines which would further determine the situations or cases requiring expropriation and/or otherwise.