Protection against expropriation of investments under the European Convention on human rights

A starting point of analysis of the concept of expropriation is a distinction between direct and indirect expropriation. The identification of types of expropriation may be a great challenge not only in legal research but also in investment arbitration disputes since the borderline between these types of expropriation in many cases is pale.

Direct expropriation entails the transfer of title as well as the physical taking or seizure of property by a host State (Cox, 2019). Nowadays direct expropriation is rare (Ster, 2007). However, sometimes such claims, although usually accompanied by indirect expropriation claims as well, are still brought. Direct expropriation refers to takings of the property where the title of the property is directly taken (Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania) or, in other words, the property of a private person is forcibly transferred to the benefit of the State or another private person (Fortier, 2004). Direct expropriation is clearly identifiable at the moment the action is executed. Indirect expropriation is often identifiable by its effects ex post facto. It does not involve an official transfer of the title yet produces the same effects. It is therefore impossible to qualify a priori measures that would result in indirect expropriation.

In principle, the main difference between direct and indirect expropriation is that in the case of the latter, the legal title of the investor to the investment remains unchanged while in the case of direct expropriation, the very title is lost. However, in certain situations, especially in cases of creeping expropriation, the line between direct and indirect expropriation claims is not always clear-cut (Garanti Koza v Turkmenistan).

International investment agreements usually do not provide definitions of expropriation and several different terms are used to define the substance of the measures concerned (Stern, 2007). While the disparity of terms exists and some tribunals in the past dwelled into the linguistic analysis of the terms overall, it does not appear that the terminological disparities introduce divergence between the applicable legal regimes. Sometimes, the term used is “measures equivalent to expropriation” while elsewhere the term used is “measures having the effect equivalent to expropriation”. Regardless of the phrasing difference, it is usually held to be the same thing (de Nanteuil, 2014). In the case ADC v Hungary, the State unsuccessfully argued that the term “deprivation” is narrower than the term “expropriation” and that therefore the case law related to expropriation shall not relevant when interpreting the term “depriving measures” (ADC v Hungary). Some authors argue that while terminologically there is a slight mismatch as to what falls under the scope of the term indirect expropriation, “measures having the effect equivalent to expropriation”, “de facto expropriation”, “regulatory takings” and “creeping expropriation” all fall under the umbrella of the notion of indirect expropriation (de Nanteuil, 2014).

In the case Parkerings v Lithuania, the tribunal found that “[d] e facto expropriation (or indirect expropriation) is not clearly defined in treaties, but can be understood as the negative effect of government measures on the investor's property rights, which does not involve a transfer of property but deprivation of the enjoyment of the property” (Parkerings v Lithuania). The term “compensation for takings” is used in the Fifth Amendment to the U.S. Constitution. The tribunal in the case Lauder v Czech Republic elaborated on the issue of terminology and stated that “BITs generally do not define the term of expropriation and nationalisation, or any of the other terms denoting similar measures of forced dispossession (‘dispossession’, ‘taking’, ‘deprivation’, or ‘privation’). Furthermore, the practice shows that although the various terms may be used either alone or in combination, most often no distinctions have been attempted between the general concept of dispossession and the specific form thereof”. The intention behind the indirectly expropriated property is not limited to the mere gain of property belonging to a foreign investor. In fact, it is rarely present and others such as political goals are more common. Therefore, indirect expropriation should not be perceived as merely “disguised” direct expropriation (Stern, 2007).

Investment is in essence the property of the investor which shall be protected by the host State. The object of protected rights can be anything having an economic value provided that it corresponds to the “investment” definition provided in the BIT or other investment instrument (Dourglas, 2005, p. 23). BITs usually provide a so-called “encompass-all” definition of an investment. The proper example of the notion of investment can be found in Article 1(1)© German Model BIT (1991) which defines investment as “claims to money or to any performance having an economic value”. The investment tribunals often also support the broadest interpretation of the notion of investment. For instance, the arbitral tribunal in the case Bayindir Insaat Turizm Ticaret Ve Sanayi A.Ş. v. Islamic Republic of Pakistan has explicitly acknowledged that “the reference to ‘every kind of asset’ is ‘[p]ossibly the broadest’ among similar general definitions contained in BIT's”. Nevertheless, this broad definition acknowledges that the concept of “investment” is dynamic and may evolve (Redfern and Hunter, 2015). The notion of protected investments should be understood in essence as any objects of property irrespective of their nature. The current state practice reveals that international investment law protects various objects against unlawful expropriation and tough in some cases the state may provide a list of the property object which are protected under the investment treaty, such a list often is “all-inclusive” and includes basically any objects. Nevertheless, in some instances, the state practice also reveals that some additional criteria for the protected investment may be applicable which may serve as identification of specific objects which are protected and what objects are excluded from the protection against unlawful expropriation.

The standards of protection of investment and exceptions which may justify expropriation are also related to the essence of the right to protection of property. This right is also protected by the Convention. Article 1 of the 1 Protocol to the Convention reads:

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by general principles of international law.

The right to protection of property in the said article is based on three major pillars which constitute the core of this right: the first rule which establishes the principle of the peaceful enjoyment of property, the second rule which covers deprivation of possessions and subjects it to certain conditions and the third rule which recognises that the Contracting States are entitled, amongst other things, to control the use of property in accordance with the general interest (Iatridis v. Greece, para. 55). These major rules of the protection of the right to property provide the standard of protection which the state must ensure and also provide exceptions when this right can be restricted in limited circumstances.

According to Article 1 of 1 Protocol of the Convention, the concept of “possession” has an autonomous meaning which is not limited to ownership of physical goods and is independent of the formal classification in domestic law: the issue that needs to be examined is whether the circumstances of the case, considered as a whole, may be regarded as having conferred on the applicant title to a substantive interest protected by that provision (Öneryildiz v. Turkey, para. 124). Accordingly, as well as physical goods, certain rights and interests constituting assets may also be regarded as “property rights”, and thus as “possessions” for the purposes of this provision (Iatridis v. Greece, para. 54). The concept of “possessions” is not limited to “existing possessions” but may also cover assets, including claims, in respect of which the applicant can argue that he has at least a reasonable and “legitimate expectation” of obtaining effective enjoyment of a property right (Öneryildiz v. Turkey, para. 124).

One may argue that the notion of property (possession) under Article 1 of 1 Protocol of the Convention should be interpreted broadly. Any object of property may fall under this notion. Thus, it may be argued that in general, any type of investment should fall under the concept of property under the Convention and can be protected under the said article.

Thus, it may be concluded that in general investment which constitutes the object of property may fall under the notion of property under Article 1 of the 1 Additional Protocol of the Convention. Moreover, the international human rights report suggests that the right to the protection of property under the Convention also applies to foreigners, including legal persons, and thus, foreign investors cannot be denied legal protection on the pretext that they can take into account the risk of expropriation and other political risks in their investment (Omtzig, 2016).

Though investment may be the object of property (possession) which is protected under the Convention, it is still debatable whether it may be an effective legal instrument to ensure the effective protection of investors against indirect expropriation. First, it is relevant to assess how the Convention treats expropriation as the act of the state which may violate the right to property and how the Convention may be directly applicable in case the dispute between the State and investor over the expropriation of property arises. Yet, certain States found it insufficient and attached declarations with regard to expropriation when approving the text of the Convention. When Portugal ratified the First Protocol of the Convention in 1978, it added an observation that “expropriation of large landowners, big property owners and entrepreneurs or shareholders may be subject to no compensation under the conditions to be laid down by the law”. The United Kingdom added an observation that “[t]he general principles of international law require the payment of prompt, adequate and effective compensation in respect of the expropriation of foreign property”. This position of the Member States of the Convention only supports the suggestion that the application of the Convention to State-investor dispute is possible, but also debatable. Though the intention of the Convention is to cover any time of property under its scope, namely the investment as the object of property, raises questions about whether the Member States actually consider investment as the property right under the Convention. Such different approaches may also impede the effective application of the right to property under the Convention and make this right illusionary if there is a lack of consensus between the Member States on whether the investment shall be protected under the Convention.

The ECHR found that compensation shall be paid not only because of general principles of law but also because such principle is part of national legal systems. In 1986 in the case of Lithgow and others v the United Kingdom, the ECHR had to decide on the amount of compensation provided by the UK government to the applicant with regard to the nationalisation of the aircraft and shipbuilding industries. The applicants did not question the principle of nationalisation as such but rather the inadequateness of the compensation. It was found that “under the legal systems of the Contracting States, the taking of property in the public interest without payment of compensation is treated as justifiable only in exceptional circumstances not relevant for present purposes. As far as Article 1 of the 1 Protocol of the Convention is concerned, the protection of the right of property it affords would be largely illusory and ineffective in the absence of any equivalent principle” (Lithgow and other v. the United Kingdom, para. 120).

Throughout the years, the question inevitably arose as to the scope of the right to regulate and protection of property rights. One of the first cases dealing with the issue was in the case Handyside where the ECHR had to decide whether a provisional seizure of a matrix and copies of a schoolbook could be regarded as a violation of Article 1 of the 1 Protocol of the Convention. The ECHR dwelled reasoned that “[a] admittedly the expression “deprived of his possessions”, in the English text, could lead one to think otherwise but the structure of Article 1 of Protocol 1 of the Convention shows that that sentence […] applies only to someone who is “deprived of ownership” (fr. “privé de sa propriété”).

However, the seizure did relate to “the use of property” and thus falls within the ambit of the second paragraph. […], this paragraph sets the Contracting States up as sole judges of the “necessity” for an interference. Consequently, the Court must restrict itself to supervising the lawfulness and the purpose of the restriction in question. The ECHR found that the contested measure was ordered pursuant to Section 3 of the 1959/1964 Acts and followed proceedings in which it was not contested were in accordance with the law. Again, the aim of the seizure was “the protection of morals” as understood by the competent British authorities in the exercise of their power of appreciation […]. The forfeiture and destruction of the Schoolbook, on the other hand, permanently deprived the applicant of the ownership of certain possessions. However, these measures were authorised by the second paragraph of Article 1 of Protocol 1 of the Convention, interpreted in the light of the principle of law, common to the Contracting States of the Convention, where under items whose use has been lawfully adjudged illicit and dangerous to the general interest are forfeited with a view to destruction” (Handyside v. the United Kingdom, paras 62–63).

The Handyside case was followed by Marckx v Belgium case in 1979. The case concerned the discrimination of illegitimate children and the ECHR found that unmarried mothers were discriminated against in freely disposing of their property compared with married mothers. With regard to the right to regulate the ECHR in this case established that “[b]y recognizing that everyone has the right to the peaceful enjoyment of his possessions, Article 1 of the 1 Protocol of the Convention is in substance guaranteeing the right of property.

This is the clear impression left by the words ‘possessions’ and ‘use of property’; the travaux préparatoires, for their part, confirm this unequivocally that the drafters of the Convention continually spoke of ‘right of property’ or ‘right to property’ to describe the subject-matter of the successive drafts which were the forerunners of Article 1 of the 1 Protocol of the Convention. Indeed, the right to dispose of one's property constitutes a traditional and fundamental aspect of the right of property” (Marckx v Belgium, p. 63). The second paragraph of Article 1 of the 1 Protocol of the Convention nevertheless authorises a Contracting State to “enforce such laws as it deems necessary to control the use of property in accordance with the general interest”. The decisions affirmed the broad discretion of the Member States of the Convention to regulate the level and rules related to the protection of investments. However, while the States enjoy wide powers under Article 1 of the 1 Protocol of the Convention, they cannot exercise such rights in a discriminatory manner (ECHR guide, p. 52).

Later the provision was also interpreted by the ECHR as applying only to foreigners as opposed to nationals of the Member States. In Gudmundsson v Iceland, it was found that “whereas, the general principles of international law, referred to in Article 1, are the principles which have been established in general international law concerning the confiscation of the property of foreigners; whereas it follows that measures taken by a State with respect to the property of its own nationals are not subject to these general principles of international law in the absence of a particular treaty clause specifically so providing; whereas, moreover, in the present instance, the records of the preparatory work concerning the drafting and adoption of Article 1 of the Protocol confirm that the High Contracting Parties had no intention of extending the application of these principles to the case of the taking of the property of nationals” (Gudmundsson v Iceland, para. 394).

In Sporrong and Lönnroth v Sweden, the applicants contested the time limits granted to the city of Stockholm for the fixing of compensation for expropriation with regard to expropriation permits and positions of construction. They also complained about the time limits that these measures were in place. Against this background, the applicants claimed that they had lost the possibility to sell their property at the normal market price. The Government agreed that the property may be more difficult to sell or lease. They also agreed that the prohibitions on construction restricted the normal exercise of the right to property. However, it held that the measures did not impair the peaceful enjoyment of possessions within the meaning of Article 1 of the 1 Protocol of the Convention. The ECHR was itself unable to accept this argument. Although the expropriation permits left intact in law the owners’ right to use and dispose of their possessions, they nevertheless in practice significantly reduced the possibility of its exercise. They also affected the very substance of ownership in that they recognised before the event that any expropriation would be lawful and authorised the City of Stockholm to expropriate whenever it found it expedient to do so. The applicants' right of the property thus became precarious and defeasible” (Sporrong and Lönnroth v Sweden, para. 60).

In this case, the ECHR also developed a test comprising of 3 rules in order to determine whether the interference found by the ECHR is in violation of Article 1 of the 1 Protocol of the Convention In James and Others v the United Kingdom. The ECHR clarified that the three rules set out in the previous jurisprudence “are not, however, ‘distinct’ in the sense of being unconnected. The second and third rules are concerned with particular instances of interference with the right to peaceful enjoyment of property and should therefore be construed in the light of the general principle enunciated in the first rule” (James and Others v. the United Kingdom, para. 37). These cumulative rules may also be applicable in case of indirect expropriation. Though, as it can be concluded from the previous case law of the ECHR in most cases the court had to deal with examples of direct expropriation as the ground for the violation of the right to property.

One of the main elements of the protection of property is the requirement of fair compensation. This is the same logic in case of violation of the state's obligations to the investor by the acts of the State which constitute indirect expropriation. The cornerstone of liability of the State for the wrongful actions dating back to the PCIJ case of the Chorzów Factory is that reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed. The protection of investors against indirect expropriation without effective remedy against wrongful state's actions would mean the possible defence mechanism rather useless. Thus, it is important to analyse whether the Convention provides effective remedies in case of violation of investor's property rights, namely in case of indirect expropriation.

While the final version of the provision provides for the right to property, Article 1 of 1 Protocol of the Convention has no explicit reference to the obligation to pay compensation in case of expropriation. The omission was intentional. The ECHR explained in the case Lithhow that “examination of the travaux préparatoires reveals that the express reference to a right to compensation contained in earlier drafts of Article 1 of the 1 Protocol of the Convention was excluded, notably in the face of opposition on the part of the United Kingdom and other States. The mention of the general principles of international law was subsequently included and was the subject of several statements to the effect that they protected only foreigners” (James and Others v. the United Kingdom, para. 117).

The case law of the ECHR reveals that in case of restriction of the right to property, the compensation shall ensure the legitimate interests of the owner and be reasonable. Pursuant to the relevant case law, the taking of property without payment of an amount reasonably related to its value will normally constitute a disproportionate interference that cannot be considered justifiable under Article 1 of 1 Protocol of the Convention (Platakou v. Greece, para. 55). Also, the case law suggests that without fair compensation, the right to property would be illusionary: the taking of property in the public interest without payment of compensation is treated as justifiable only in exceptional circumstances not relevant for present purposes. As far as Article 1 of 1 Protocol of the Convention is concerned, the protection of the right of property it affords would be largely illusory and ineffective in the absence of any equivalent principle. Nevertheless, the standard of compensation set out by the ECHR also suggests that the compensation may not always be the full one: “the taking of property without payment of an amount reasonably related to its value would normally constitute a disproportionate interference which could not be considered justifiable does not guarantee a right to full compensation in all circumstances (James and Others v. the United Kingdom, para. 54).

The analysis of the standards of the compensation for restriction to the right to property under the Convention reveals that it must be equivalent and well-balanced. The balance in this case should be established between the need of the state to restrict this right and the economic loss suffered by the person (for instance, an investor). Such a balance may be established in each specific case, depending on the individual circumstances. Nevertheless, the ECHR does not couple the fair compensation standard with full compensation. This approach may contradict the dominant approach in international law which in the case of state's internationally wrongful actions requires that reparation (compensation) must, as far as possible, wipe out all the consequences of the illegal act.

The aim and scope of the right to property under Article 1 of the Protocol 1 of the Convention suggest that investment actually should fall under the notion of investment of this article. This conclusion allows to argue that the Convention should be regarded as a possible instrument for the protection of investors' rights. However, namely, the question of compensation for indirect expropriation raises significant debate. The text of Article 1 of Protocol 1 of the Convention and the relevant case law of the ECHR does not support the application of the principle of full compensation for unlawful acts of the state. This contradiction between the general customary international law rule applicable in investment arbitration and the limits of compensation against the wrongful acts of the state in the Convention leaves the question of compensation in case of indirect expropriation still unanswered.