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An Investment Law Answer

Unlawful Expropriation

Investors who benefit from the protection of an investment instrument, such as a bilateral or multilateral investment treaty, will generally have a substantive right, set out in such a treaty, to receive compensation for an expropriation of their assets by a state (Knox 2014).

Most bilateral and multilateral investment instruments prohibit direct and indirect (also known as "de facto") expropriations or measures having "equivalent effect to" or "tantamount to" an expropriation. Direct expropriation is relatively easy to recognise, being a taking of tangible or intangible assets by a state. Indirect expropriation takes place when steps that fall short of an actual physical taking of property nonetheless constitute a deprivation of property rights (sometimes even where legal title remains with the foreign investor), unreasonable interference causing a loss of management use or control or significant depreciation in the value of the assets of a foreign investor (Knox 2014).

As the facts do not indicate that legal title to the investment has been transferred to Boxton Municipality this is an example of indirect appropriation.

Indirect expropriations are assessed at least in part on the basis of the effect of the measure in question on the foreign investor. If the measure in question only results in a minor, or insignificant, interference with the property rights of the investor, it generally will not qualify as an indirect expropriation. Therefore, a certain level of interference is required in order for there to be an expropriation. The applicable test has been stated as "whether that interference is sufficiently restrictive to support the conclusion that the property has been taken" from the owner' (Pope & Talbot Inc. v Government of Canada). Generally, at least a "substantial loss of control or value" (UNCTAD, Taking of Property 2000)) or "severe economic impact" (Yannaca-Small 2005) is required.

The investors' reasonably expected economic benefit from the investment is a relevant factor in the assessment of the validity of an expropriation claim. A host state may make specific commitments to the investor or more general undertakings may be apparent from the legal framework of the host state. However, expectations may not be regarded as legitimate by tribunals where investors are not given specific state assurances (such as the Metalclad case (Metalclad Corp v United Mexican States (2000)) or where investors are aware that they are entering a particularly high risk market.
In the instant case Autoforever has lost control of one particular building project. However, they continue to control the aspects of the contract related to collecting parking fines. The bulk of the contract remains and no specific assurances have been given which would create a legitimate expectation that the particular part of the contract would be cancelled.

Furthermore, a very significant factor in characterising a government measure as falling within the expropriation sphere or not, is whether the measure refers to the State's right to promote a recognised "social purpose" or the "general welfare" by regulation (OECD 2004). The existence of generally recognised considerations of the public health, safety, morals or welfare will normally lead to a conclusion that there has been no "taking". As part of the contract has been cancelled for public safety reasons this is further evidence there has been no expropriation.

The fair and equitable treatment standard is one of the most important principles in modern international investment agreements. The standard protects investors from any serious instances of arbitrary or discriminatory conduct by host states. Most bilateral treaties will impose on a host state an obligation to treat foreign investors fairly. Case law indicates that the fair and equitable standard encompasses ensuring that the normal conduct of the investor's business is not interfered with without good reason.

Legitimate Expectations

One of the most common claims in this area is under the heading of legitimate expectations. This applies in circumstances in which assurances have been made to the foreign investor in the contract or non-contractual documents, by the law of the host state and even verbal communications by senior officials of the host state (Sornorajah 2010). The breadth of the standard has been described as 'staggering and could not have been agreed to by the states concluding the treaties' (Sornorajah 2010).

Fair and equitable treatment has been defined by the ICSID as involving an obligation to provide 'international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment' (Tecnicas MT SA v United Mexican States 2003). In Occidental v Ecuador (2012) the ICSID tribunal held that the requirement extended beyond mere administrative consistency but also includes a standard of maintaining a stable legal framework. This case involved a claim against the Ecuadorian government for altering legislation which allowed the investor company to claim back VAT. The tribunal in Occidental asserted that 'there is certainly an obligation not to alter the legal and business environment in which the investment has been made.' This was further emphasised in El Paso v Argentina (2011) in with the tribunal stating that the host state 'should not unreasonably modify the legal framework or modify it in contradiction with a specific commitment'. The tribunal in Occidental concluded that '[t]he tax law was changed without providing any clarity as to its meaning and extent' and that such actions violated the requirement of fair and equitable treatment. The guidance and approach by Ecuador was fundamentally ambiguous and therefore Ecuador had not met the standard.

The scope of the fair and equitable treatment standard cannot exclusively be determined by a foreign investor's subjective motivations and considerations. Its expectations, in order to be protected, must be legitimate and reasonable in light of the circumstances (Saluka v. Czech Republic (2003). The host State's legitimate right subsequently to regulate domestic matters in the public interest must be taken into consideration as well (Saluka v. Czech Republic 2003). The determination of a breach of fair and equitable treatment therefore requires a weighing of the investor's legitimate and reasonable expectations on the one hand and the State's legitimate regulatory interests on the other.

On one hand Autoforever when they entered into the contract would have a legitimate expectation that a business environment existed that allowed them to build car parks. However, Concordia have the right to alter the business environment in relation to sustained and powerful demonstrations against such building. It is likely that there will be held to be no frustration of legitimate expectations in the present case. Furthermore, there is an onus on investors to 'anticipate that the circumstances could change, and thus structure its investment in order to adapt it to the potential changes of environment.' (Parkerings-Compagniet AS v. Lithuania (2007)).

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Article published 25/05/2017

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