After the landmark decision of the Court of Justice of the European Union (hereinafter – the CJEU) in
The application of the European Convention on Human Rights (hereinafter – Convention) in the context of international investment law and particularly direct and indirect expropriation and the settlement of investment disputes deriving from such cases maybe be relevant, but also problematic. The general problems of the application of the Convention in investment disputes have been already in the legal doctrine even before and after the
However, the application of the right to property as guaranteed under the Convention in the State – investor disputes over expropriation triggers various complex questions. It is important to assess whether, first, the notion of property in the Convention indeed encompasses investments as they are understood under international investment law and whether the protection of property may be regarded as a sufficient legal instrument to protect investors' rights. Second, it is important to analyse whether the right to compensation as the effective legal remedy against unlawful state actions may be afforded under the Convention in the case the right to property is violated (act of expropriation is performed).
The purpose of this study is to assess whether, in the case of expropriation of investments by the EU Member States, investors may effectively defend before the national tribunals under Article 1 of the Protocol 1 of the Convention. The authors use comparative and deductive methods for the analysis of the relevant legal sources and formulation of the conclusions and proposals. The authors found that the right to property under the Convention also protects foreign investments against expropriation. Nevertheless, one of the problematic issues remains the full compensation standard for expropriation.
This article analyses a few relevant aspects of the application of the Convention in case of investment disputes before the national courts in the EU in cases of expropriation of investments. First, it focuses on the notion of expropriation in investment law and reveals the differences between direct and indirect expropriation. Second, it analyses whether investments, as traditionally perceived in international investment law, may fall under the notion of property (possession) under Article 1 of the Protocol 1 of the Convention. Third, it assesses whether this provision indeed provides effective protection of the investment. Fourth, it analyses the problems of compensation for direct or indirect expropriation of the investment. The relevance of this study is revealed by the gap in the effective legal remedies for the investors against expropriation in the EUR after the CJEU judgment in the
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
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 “
In the case
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
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:
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
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
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
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
In
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
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
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
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.
With the
One of the problematic issues related to the application of the right to property under the Convention in investment disputes is the question of fair compensation. Traditionally, the customary international law which is applicable in expropriation disputes requires full compensation for the internationally wrongful act of the state. This is a firm customary international law rule. Nevertheless, the right to property (and protection) against unlawful interference in it under the case law of the ECHR does not necessarily mean full compensation since the standard of fair compensation is applied. This situation requires to assess whether the standards of the protection against unlawful interference into property rights, such as expropriation of investment, would not also require changing the current case law and full compensation shall not be paid by the host State.