2013 Thomson Reuters. No Claim to Orig. US Gov. Works.
American Journal of International Law April, 1985
AGORA: What Price Expropriation?
*414 COMPENSATION FOR EXPROPRIATION: THE CASE LAW
M. H. Mendelson [FNa1]
Copyright (c) 1985 by the American Society of International Law; M. H. Mendelson
Controversy continues to rage over whether the Hull formula, requiring the payment of prompt, adequate and effective compensation for the otherwise lawful taking of aliens' property by the state, represents or has ever represented the customary international law standard. Draft section 712 of the American Law Institute's Re- statement of the Foreign Relations Law of the United States (Revised) [FN1] simply states the standard as just compensation. Comment e does, it is true, assert that the United States has consistently championed the Hull formula; but all in all, the text accompanying draft section 712 is somewhat guarded as to the position in general international law. In the January 1984 issue of this Journal, Davis R. Robinson, Legal Adviser of the State De- partment, criticized the draftsmen's hesitancy about what he called the traditional standard. [FN2] Battle was immediately joined by Professor Oscar Schachter who, in the same issue, questioned whether the so-called tra- ditional standard is or ever was a rule of customary law. [FN3]
For various reasons, it would be inappropriate for me here to enter into a comprehensive examination of the current position in customary law, let alone embark on a discussion of the possible merits or demerits of various standards of compensation as a matter of lex ferenda. Nor do I wish to comment on the present form of the draft Restatement. However, I would like to question what seems to me to be a potentially misleading account by Professor Schachter of a particular aspect of the matter namely, the standard laid down by the decisions of international courts and tribunals [FN4] with regard to the sufficiency of compensation.
According to the former joint editor in chief: It is true that several traditional decisions of international tribunals recognize an international obligation to pay compensation when alien property is taken by a state. However, contrary to what is often asserted, these decisions contain no *415 reference to the prompt, adequate and effective standard. [FN5] This statement may be true in a literal sense; but, when it is made in the context of a broader thesis that just compensation is a flexible standard which does not necessarily require payment in full, [FN6] the natural implication is that the cases support, or at least do not contradict, his thesis. If this is what Professor Schachter means to suggest, it is respectfully submitted that he is mistaken; if it is not what he means, the ambiguity is very unfortunate. Whilst the cases do not espouse the Hull formula in so many words, they do require the payment of full compensation and provide no support for a flexible standard in this regard.
PREWAR CASES 79 AMJIL 414 Page 2 79 Am. J. Int'l L. 414 2013 Thomson Reuters. No Claim to Orig. US Gov. Works.
Professor Schachter tells us that probably the most frequently cited opinion in this field, the Chorzow Factory case in the Permanent Court of International Justice, [FN7] refers only to a duty to sic payment of fair compensation. [FN8] This is an inaccurate account of the Court's celebrated obiter dicta. The actual decision in the case turned upon a finding by the Court that Poland was in breach of its obligations to Germany under the Geneva Convention concerning Upper Silesia of May 15, 1922. In the case of an unlawful expropriation, the Court found, the primary duty was one of restitution in kind, or, if this is not possible, payment of a sum cor- responding to the value which a restitution in kind would bear together with the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it. [FN9] The Court contrasted this with the obligation that Poland would have been under had this been a normal expropriation to render which lawful only the payment of fair compensation would have been wanting. [FN10] But this is not the only dictum on the point, for on the very next page the Court spoke of the obligation, in cases of lawful expro- priation, to pay the just price of what was expropriated and the value of the undertaking at the moment of dispossession, plus interest to the day of payment. The just price of what was expropriated and the value of the undertaking are phrases rather more consistent with full compensation than with a more flexible standard, es- pecially bearing in mind the legal, political and economic assumptions of members of the Court, and of the legal systems they represented, in 1928. Moreover, it seems quite clear from the Judgment as a whole, [FN11] the separate opinions and the pleadings, that the *416 Court considered that the minimum pecuniary obligation in all cases was the payment of the full value of the property taken; what distinguished unlawful from lawful takings was the additional obligation in the former case, if restitutio in integrum was impossible, to compensate for consequential loss. What the Court said and assumed about the standard of compensation for lawful takings may, strictly speaking, be obiter, but it has traditionally been regarded as the locus classicus on the subject and, for better or for worse, it supports a full compensation standard.
The only other case Professor Schachter refers to by name in this context is the Norwegian Shipowners' Claims arbitration of 1922. [FN12] Now, it is true that the Permanent Court of Arbitration in that case (Valloton, President; Anderson, Vogt) described the applicable standard as just compensationa phrase which Professor Schachter himself favors; but what is significant for our purposes is that it was common ground between Norway and the United States that the appropriate standard was just compensation in the sense in which that phrase is used in United States constitutional law, and the tribunal so awarded. [FN13] In the Fifth Amendment to the United States Constitution, as interpreted by the Supreme Court, just compensation means the full amount of a fair valuation based on the price a willing buyer would pay to a willing seller. [FN14] The arbitral tribunal decided that the fair market value of the claimants' property should be paid, and treated just, full and fair as vir- tually interchangeable notions so far as the standard of compensation was concerned. [FN15] Whether or not the award supports the prompt and effective formula which Professor Schachter questions but which is outside the scope of the present paper to discussit certainly does not support the view that fair compensation can be less than full. [FN16]
These are the only cases referred to by name in the relevant part of the Editorial Comment, but the author goes on to say that [i]f we look for traditional law in the earlier cases, such as those collected by Ralston in his classic work, [FN17] we cannot find a single decision expressing the prompt, adequate and effective compensation formula. [FN18] Once again, whilst it may be literally true that (so far as I am aware) none of the cases adopts the actual words of the Hull formula, there are in fact several decisions of international arbitral tribunals, both before and after the Chorzow case, that require the payment of full compensation in cases of *417 otherwise lawful expropriation. [FN19] Naturally, the tribunals were more concerned with the facts before them than with laying down broad principles applicable to a wide range of hypothetical circumstances, but this is normal practice and 79 AMJIL 414 Page 3 79 Am. J. Int'l L. 414 2013 Thomson Reuters. No Claim to Orig. US Gov. Works. certainly does not warrant the inference that the general standard was regarded as flexible. [FN20] The con- sistency of the case law is not unimpressive, [FN21] as a chronological survey will demonstrate. [FN22]
The compensation provisions of Article 297 of the Treaty of Versailles were extended by the Treaty of Berlin of 1921 to the United States. Under Article 297, Germany was to pay compensation for damage to the prop- erty, rights and interests of Allied nationals caused by exceptional war measures or forced transfers. In Ad- ministrative Decision No. III, [FN23] the U.S.-Germany Mixed Claims Commission assumed for the purposes of its opinion that the property in question was taken in conformity with the laws of war but held, nevertheless, that Germany was obliged to make full, adequate, and complete compensation or reparation for all losses sustained by American nationals falling within the terms of the Treaty of Berlin, the value of the property to be assessed as the reasonable market value of the property as of the time and place of taking . . . if it had such market value; if not, then the intrinsic value of the property as of such time and place. [FN24] And in the Goldenberg case, the sole arbitrator (Fazy), applying the same provision of the Treaty of Versailles, held that even in the case of lawful requisition, the property had to be equitablement payes le plus rapidement possible, and that the payment of one-sixth of the market value of the property as of the date of taking amounted to a wrongful confiscation of the other five-sixths. [FN25]
In the Spanish Zones of Morocco case, the sole arbitrator, Max Huber, held that il peut etre considere comme acquis qu'en droit international un etranger ne peut etre prive de sa propriete sans juste indemnite [FN26] *418 and, in applying this standard, employed the value of the property as of the date of taking, plus interest. [FN27]
In the De Sabla case, the United States-Panama General Claims Commission held that [i]t is axiomatic that acts of a government in depriving an alien of his property without compensation impose international responsi- bility, and went on to hold that the claimant was entitled to the full value of property which had been adjudi- cated to third parties. [FN28]
Enough has perhaps been said to show that the traditional standard laid down by the prewar cases did require the payment of full compensation, even in the case of lawful takings. More recent arbitral decisions suggest that, even now, there is still life in the old standard. [FN29]
POSTWAR CASES
The LIAMCO arbitration [FN30] is generally regarded as the mostradical of the trio of cases arising out of the Libyan decrees of the 1970s taking over foreign-owned oil concessions. [FN31] The sole arbitrator (Mah- massani) preferred not to treat the Government's action as an unlawful taking, but nonetheless recognized that international law requires the payment of compensation even in the case of a lawful nationalization. On the question whether there could be recovery for lucrum cessansbroadly, loss of profitshe regarded international law as unsettled, and preferred to employ the notion of equitable compensation. [FN32] Nevertheless, af- firming the undisputed legal obligation of the nationalizing State to pay full compensation for all the loss sustained (damnum emergens), he awarded the claimants the market value of their physical plant and property as of the date of taking, as well as equitable compensation (including an element for loss of profits) for the termination of one of their concessions. [FN33]
In the AMINOIL arbitration, [FN34] a distinguished arbitral tribunal (Reuter, President; Sultan, Fitzmaurice) held that it was not in the particular circumstances unlawful to nationalize the concession and related physical 79 AMJIL 414 Page 4 79 Am. J. Int'l L. 414 2013 Thomson Reuters. No Claim to Orig. US Gov. Works. assets in question; neverthelessand in accordance with principles which, *419 in the tribunal's view, the ex- propriating state had itself recognizedit held that the company was entitled to the depreciated replacement value of its fixed assets, together with compensation for loss of future profits.
Finally, there is the decision of Chamber Three of the Iran-United States Claims Tribunal in American In- ternational Group, Inc. and American Life Insurance Co. v. Islamic Republic of Iran and Central Insurance of Iran. [FN35] The claim arose out of the nationalization of the Iran America International Insurance Co. in 1979. The claimants relied upon both customary law and the Treaty of Amity, Economic Relations, and Consular Rights between the United States and Iran of August 15, 1955. The respondents disputed the continuing validity of the Treaty and also its applicability to the case. In the event, the Tribunal concluded that it did not have to decide this question, in effect holding that, in a case of lawful nationalization, the standard of compensation was the same under customary law as under the Treaty. So far as customary law was concerned, the respondents further argued that the traditionally asserted standard of prompt, adequate and effective compensation . . . has been repudiated by modern developments in international law; instead, a standard of partial compensation should be applied, based on references contained in resolutions of United Nations organs and from post-war settlement practice. They further contended that even if the standard of compensation were held to be just compensation for full value, it would be inappropriate and unreasonable to value the property as a going concern; instead, they sug- gested a net book value approach. [FN36] The Tribunal rejected these submissions and held that the claimants were entitled to the fair market value of the shares in Iran America at the date of nationalization; it valued the company as a going concern, taking into account not only the net book value of its assets but also such elements as good will and likely future profitability. [FN37]
CONCLUSIONS
Interesting and important questions can be asked about the morality and expediency of different compensa- tion standards. And even if we confine our discussion to the lex lata, it is not suggested that the present review is conclusive. Case law is far from being the only, or the most important, source of international law. An adequate account of the current general law on the subject would entail a comprehensive review of the *420 state prac- ticeincluding an assessment of the extent (if any) to which various General Assembly resolutions and patterns of treaty making in the postwar period may have affected a traditional standard. The writings of publicists and the possible relevance of general principles of law would also have to be taken into consideration. All these matters are beyond the scope of this paper. However, as Professor Schachter himself implicitly recognized, a correct interpretation of the case law is an important element in determining whether a traditional standard of full compensation for otherwise lawful state takings ever existed. My analysis suggests that, according to the case law at least, it did exist; and I would respectfully suggest that Professor Schachter's account is in this respect erroneous ordue to its ambiguitiesmisleading.
[FNa1]. Fellow in Law, St. John's College, Oxford. Although I am counsel for Vosper p.l.c. in a case arising out of the nationalization of the British aircraft- and ship-building industries in 1977, now pending in the European Court of Human Rights, the views expressed here are personal and responsibility for them is mine alone.
[FN1]. RESTATEMENT OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES (REVISED))))))) 712 (Tent. Draft No. 3, 1982).
[FN2]. Expropriation in the Restatement (Revised), 78 AJIL 176 (1984).
79 AMJIL 414 Page 5 79 Am. J. Int'l L. 414 2013 Thomson Reuters. No Claim to Orig. US Gov. Works. [FN3]. Compensation for Expropriation, id. at 121.
[FN4]. Schachter largely eschews discussion of the decisions of municipal courts and tribunals, and I shall follow suit. It should be noted, however, that the widespread use in treaties of a phrase based on the Hull formula has recently been held by the U.S. Court of Appeals for the Sixth Circuit to be sufficiently unambiguous to provide a controlling legal standard within the meaning of Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398 (1964); see Kalamazoo Spice Extraction Co. v. Provisional Military Gov't of Socialist Ethiopia, 729 F.2d 422 (6th Cir. 1984).
[FN5]. Schachter, supra note 3, at 122-23.
[FN6]. By full compensation, I mean the full value of the property assessed according to fair principles of valuation. For present purposes, the notion of full compensation and the Hull formula can be regarded as in- terchangeable; I shall not be dealing with the (often subsidiary) issues of the promptness and effectiveness of the compensation.
[FN7]. Case Concerning the Factory at Chorzow (Merits), 1928 PCIJ, ser. A, No. 18.
[FN8]. Schachter, supra note 3, at 123.
[FN9]. 1928 PCIJ, ser. A, No. 17, at 47.
[FN10]. Id. at 46.
[FN11]. Including the instructions given for an expert inquiry by the Order issued simultaneously with the Judgment (id. at 99)an Order whose significance in matters of valuation appears to have been largely over- looked by commentators.
[FN12]. (Nor. v. U.S.), 1 R. Int'l Arb. Awards 307 (1922).
[FN13]. Id. at 332 and 339.
[FN14]. See, e.g., Monongahela Navigation Co. v. United States, 148 U.S. 312 (1893); and, for a recent example, Kirby Forest Indus. v. United States, 104 S.Ct. 2187 (1984).
[FN15]. 1 R. Int'l Arb. Awards at 339-42.
[FN16]. It should also be noted that the Norwegian Shipowners' Claims award was cited in oral argument in the Chorzow Factory case. 1928 PCIJ, ser. C, No. 15-II, at 161, 180.
[FN17]. J. H. RALSTON, THE LAW AND PROCEDURE OF INTERNATIONAL TRIBUNALS (rev. ed. 1926, supp. 1936).
[FN18]. Schachter, supra note 3, at 123. 79 AMJIL 414 Page 6 79 Am. J. Int'l L. 414 2013 Thomson Reuters. No Claim to Orig. US Gov. Works.
[FN19]. Including two in Ralston itself: the De Sabla and Spanish Zones of Morocco cases (discussed below).
[FN20]. Pace Schachter, supra note 3, at 123.
[FN21]. In fairness, it should be pointed out that the compromis d'arbitrage in a particular case may have given the tribunal either a narrower or a wider discretion than that accorded by general international law (for instance, the compromis in the Norwegian Shipowners' Claims required the tribunal to decide the claims in accordance with the principles of law and equity, 1 R. Int'l Arb. Awards at 310); but since those who are going to have to apply the law today are less likely to be the International Court of Justice than other arbitrators bound by similar terms of reference, or the parties themselves, this caveat should be seen in its proper perspective.
[FN22]. I have not included in this survey cases where, rightly or wrongly, there was a holding that the taking was unlawful under general or particular international law (e.g., the premature termination of a concession in the Lighthouses Arbitration, Claim No. 27, 23 ILR 299 (1956)); but it should be noted that in several of these cases it seems to have been assumed without discussion that full compensation was required even for lawful takings. See, e.g., Upton Case (U.S. v. Venez.), 9 R. Int'l Arb. Awards 234 (1903), a case where damages were awarded for the temporary taking of, and damage to, property.
[FN23]. 7 R. Int'l Arb. Awards 64, 65 (1923).
[FN24]. Id. at 66.
[FN25]. (Germ. v. Roumania), 2 id. at 901, 909 (1928).
[FN26]. Id. at 615, 647 (1925).
[FN27]. E.g., in Claim No. 6, id. at 666.
[FN28]. 28 AJIL 602, 611-12 (1934).
[FN29]. Note also the separate opinion of Judge Gros in the Case Concerning the Barcelona Traction, Light & Power Co., Ltd. (New Application) (Belg. v. Spain), 1970 ICJ REP. 3, 267, 276 (Judgment of Feb. 5), holding that, even in the case of a lawful taking, shareholders are entitled to compensation for their investment and what it represented on the date of the damage.
[FN30]. Libyan American Oil Co. v. Government of the Libyan Arab Republic, Apr. 12, 1977, 62 ILR 140 (1982), 20 ILM 1 (1981).
[FN31]. In the other two, BP Exploration Co. (Libya) Ltd. v. Government of the Libyan Arab Republic, Oct. 10, 1973, 53 ILR 297 (1979), and Texaco Overseas Petroleum Co. and California Asiatic Oil Co. v. Government of the Libyan Arab Republic, Jan. 19, 1977, id. at 389, 17 ILM 3 (1978), the remedies awarded were, respectively, damages and restitutio in integrum; accordingly, they will not be discussed here. They are, however, even more conservative in their general approach than the LIAMCO award. 79 AMJIL 414 Page 7 79 Am. J. Int'l L. 414 2013 Thomson Reuters. No Claim to Orig. US Gov. Works.
[FN32]. 62 ILR at 209-10.
[FN33]. Id. at 211-14.
[FN34]. Arbitration between Kuwait and American Independent Oil Co., Mar. 24, 1982, 21 ILM 976 (1982).
[FN35]. 23 ILM 1 (1984). The Iranian arbitrator, Parviz Ansari Moin, refused to sign the award.
[FN36]. Id. at 7.
[FN37]. Id. at 9 and 11, respectively. In the course of his concurring opinion, Richard M. Mosk rejected the suggestion that, in customary law, less than full compensation can constitute appropriate compensation (id. at 14, 19). See, to similar effect, the opinion of George H. Aldrich, concurring in Chamber Two's award on agreed terms in ITT Industries, Inc. v. Islamic Republic of Iran, 2 IRAN-U.S. CLAIMS TRIBUNAL REP. 349 (1983-I); but see also Dr. Shafeiei's note in reply to this opinion (id. at 356, 358).