MARKET COMMENTARY 45
REQUIREMENTS FOR CREEPING EXPROPRIATION It has long been established that investment treaty tribunals are not bound by previously rendered awards. Arbitral tribunals proceed on a case-by-case basis as to whether the actions of a particular state amount to a creeping expropriation. This is not to say, however, that previously rendered decisions do not offer guidance as to the particular components that, if apparent, will lead to a finding that a creeping expropriation has occurred. I. SUBSTANTIAL INTERFERENCE The need to establish ‘substantial interference’ is controversial. Although not a traditional ‘taking’ of an investment, if the state in question interferes to such a degree as to deprive the investor of the enjoyment, use or benefit derived of its investment, a creeping expropriationmay be deemed to have occurred. Numerous decisions endorse the view that a significant degree of interference is required before a tribunal will find that a creeping expropriation has occurred. Metaclad Corp v UnitedMexican States (NAFTA) is particularly pertinent on this: “...expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property...but also covert or incidental interference with the use of propertywhich has the effect of depriving the owner inwhole or in significant part, of the use or reasonably-to-be- expected economic benefit of property even if not to the obvious benefit of the host State.” So far so good for insurers and insureds. However, the real difficulty comes when determining whether the level of interference is of the requisite degree. An insignificant restriction or interference with property rights is not generally considered to be sufficient for a finding of creeping expropriation; the decisive element is the ‘substantial loss of control or economic value of a foreign investment’, as referred to by James Crawford AC SC in ‘Brownlie’s Principles of Public International Law (8th ed. 2012). For example, the tribunal in Pope& Talbot Inc. v Government of Canada rejected the investor’s claim that Canada’s export control regime constituted an expropriation as it interferedwith its exports to the US, holding that ‘the test [should be] whether that interference is sufficiently restrictive to support the conclusion that the property has been ‘taken’ from the owner.’ While the interferencemay have reduced profits, the investor still exported considerable quantities of its product and earned substantial returns, rendering its argument unsuccessful. Numerous decisions have held that an investor’s continued control of an enterprise goes against the finding of a creeping expropriation. The requirement of either total or substantial deprivation has led to numerous decisions denying that an expropriation had occurred owing to the investor’s retention of control over the asset inwhich it hasmade its investment. II. THE IRREVERSIBILIT Y AND PERMANENCE OF THE CONTESTED MEASURES The requirement of a certain degree of permanence to the state’s interference is also controversial. While TecnicasMedioambientales Tecmed SA v UnitedMexican States referred to a ‘de facto expropriation [being] irreversible and permanent’, subsequent decisions have taken a more pragmatic approach, preferring to look at the effect of the state action, even if it amounted to a temporarymeasure. For example, the tribunal inWena Hotels Ltd v Arab Republic of Egypt held that an Egyptian public sector company’s one-year seizure of two hotels pursuant to a dispute over lease terms wasmore than an ‘ephemeral interference’ and amounted to an expropriation. III. INTENTION VERSUS EFFECT Often referred to as the ‘sole effect doctrine’, many tribunals have endorsed the view that it is the effect of the statemeasure on the economic benefit, value and control over the assets that must be considered and that the state’s intention to expropriate, though of potential assistance, is not decisive.
Given the fact that investment treaty tribunals are not bound by previously rendered awards, it is perhaps unsurprising that the requirements for a creeping expropriation are not particularly clear- cut. For both insurers and insureds, this is problematic andwould likely be a significant argument against allowing for reference to such awards for the purposes of coverage determination under a political risk policy. But is there any element of the treatment afforded to the concept of creeping expropriation on the investment treaty level that could be of significant beneficial use? THE DATE OF LOSS The date of loss is one of the first issues considered in any coverage analysis under any insurance claim. If the insured’s loss falls outside of the designated policy period, it does not fall within the confines of the contract and no further analysis is required – no indemnity is due. While a date of loss is simple to establish in a number of cases (i.e. in the case of a home-contents insurance policy claim following a break-in), the issue is somewhat more complicatedwhen considering a claimunder a political risk policy, especiallywhen considering creeping expropriation. Is the date of loss to be determined from the first of the incremental steps taken by a host state, or the last?What happens when the former falls within a policy period and latter falls outside? Is investment treaty case-law of potential benefit here? In Siemens A.G. v. Argentine Republic, the tribunal found that the State committed both a direct expropriation via issuing a decree unilaterally terminating the investor’s service contract, and a creeping expropriation bymeasures leading to the decree, including suspending certain services under the contract and attempting to impose a ‘non-negotiable’ renewed agreement. Significantly for political risk policy claims, the tribunal stated: “By definition, creeping expropriation refers to...steps that eventually have the effect of an expropriation. If the process stops before it reaches that point, then expropriationwould not occur. This does not necessarilymean that no adverse effects would have occurred...the last step in a creeping expropriation that tilts the balance is similar to the straw that breaks the camel’s back.” (emphasis added) The above appears to provide clarity; it is the final action that one should be concernedwith in any coverage analysis under a political risk policy. However, as noted by the tribunal in Azurix Corp v Argentine Republic, ‘[t]here is no specific time set under international law for measures constituting creeping expropriation to produce the effect...Howmuch time is neededmust be CONCLUSION Should political risk policies include a standard clause allowing for the consideration of investment treaty awards for the purposes of coverage analysis? It is difficult to say. In the scenario of an insured’s loss that happens to closelymirror the facts of a case previously considered by an investment treaty tribunal, the answer is likely to be yes. However, as the brief analysis above demonstrates, any deviation fromsimilar facts, and the wealth of consideration given to the concept of creeping expropriation by investment treaty tribunals couldwell make the sometimes difficult task of coverage analysis under a political risk policy even harder. A version of this article was first published in the Kluwer Arbitration Blog, April 2014 judged by the specific circumstances of each case’. The waters are somewhat muddied once again.
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