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Contractors’ claims for expropriation of contractual rights on the basis of international investment treaties

Marianna C TsatsanifouMonday 28 June 2021

Image credit: Guiderom/Shutterstock.com

This article analyses when claims for expropriation of contractors’ contractual rights can be made against states on the basis of international investment treaties. The approaches adopted by arbitral tribunals in expropriation claims are examined in relation to various types of contract and then compared to the approaches followed in relation to construction contracts. This article concludes that construction contract cases do not differ from the cases relating to other contract types when it comes to expropriation of contractual rights. It also proposes some recommendations on the subject to contractors as potential foreign investors.

Introduction on expropriation of contractual rights

The protection of foreign investors from unlawful and uncompensated expropriation of their property by the host state has traditionally been among the fundamental guarantees of international investment treaties. Apart from tangible assets, most investment treaties such as ICSID, ECT, NAFTA and the vast majority of BITs,[1] have recognised that an investor’s contractual rights, as a form of intangible property with an economic value,[2] are qualified ‘investments’ capable of being expropriated by the host state.[3]

Expropriation of contractual rights may occur in cases where the investor has a contractual relationship with a state body, authority, state-owned entity or even a private entity that under certain circumstances acts as the state’s arm in a business transaction. Expropriation may particularly occur when the state-counterparty acts in breach of contract (or even exercises a contractual right) but in a way that deprives the investor substantially and permanently of its right of use and enjoyment of its investment under the contract. That action must be attributable to the state,[4] and must be the result of exercise by the state-party of sovereign authority.

Not every breach or failure of the state-party will therefore amount to an expropriation

Not every breach or failure of the state-party will therefore amount to an expropriation. Specifically, a contractual breach will not ipso facto also entail a breach of the applicable international investment treaty. The state may well have acted in a mere commercial capacity like any private contracting party. Or perhaps the state’s action, albeit in a sovereign capacity, was justified and acceptable within the context of its right and power to legislate its domestic environment. If the state’s conduct is found to be only in breach of contract and not in breach of the treaty, the investor cannot claim for compensation under investment treaty law.

Consequently, the first step (and challenge) in the relevant arbitral case will be to determine whether the conditions are met for the state-counterparty’s alleged conduct to constitute in fact an expropriation, and not an action purely contractual in nature. It is only after expropriation is found that the investment tribunal will examine the legality of the relevant state conduct (ie, public purpose, non-discrimination, due process, and compensation).

Why is this subject relevant to contractors?

The risk of expropriation, including that of contractual rights, is a political risk which a contractor should take into consideration in assessing its business risks prior to bidding for and working on a project in a foreign state.[5] However, not many construction professionals are familiar with the concept, and are, therefore, unaware of the protection available to them under the applicable investment treaties.

By way of illustration, a foreign contractor has signed a contract with the Ministry of Infrastructure of foreign State X for the construction of a railway project. The contractor performs and delivers its work as per the contract, but the Ministry refuses to pay. The contractor’s right for payment under the contract is infringed, while the Ministry breaches its own obligation to pay. The contractor primarily has a contractual claim against the Ministry, and should adhere to the dispute resolution procedure in the contract. However, if an investment treaty exists between the contractor’s home country and State X, according to which the contractor’s right to payment under the said contract is a protected investment, the contractor may be able to raise a treaty claim against State X, seeking protection against the expropriation of its right through international arbitration proceedings. The benefits for the contractor in this case include:

  • The claim is brought directly against State X; notwithstanding that it was a certain Ministry that did not pay. Therefore, the contractor will be able to enforce against state assets located anywhere in the world, whereas the Ministry’s assets may be limited and restricted within the state’s territory.
  • The contractor can claim directly against the state, even if its contractual counterparty was a private entity, insofar as they can demonstrate that the latter’s conduct was attributed to the state (eg, state exercising political pressure).
  • Investment arbitration proceedings are certainly a good additional option, when recourse to local courts as per the contract mechanism is not viable or is deemed by the contractor unfavorable, particularly so in consideration of in consideration of the wider benefits of arbitration compared to litigation (speed, expertise, impartiality, independence, etc.).
  • The dispute will be resolved on the basis of international public law and principles (eg, equity). By contrast, a pure contractual breach will be inevitably linked to the contract’s governing law, which may be restrictive. For example, the damages awarded for a state’s international violation will usually amount to the market value of the contractor’s investment,[6] which shall not be the case for damages under the contract.

Arbitral approach on expropriation of contractual rights

There are certain principles and conditions to which investment arbitral tribunals have referred to establish an expropriation of a foreign investor’s contractual rights in a particular case.

Contract breach versus treaty breach

A state entity may breach the contract without necessarily breaching the applicable investment treaty. It has been held (Vivendi 2) that, even though a treaty breach and a contract breach may eventually overlap, they are still distinguished, and whether they have respectively occurred should be examined by reference to international law (for the treaty breach) and the contract’s governing law (for the contract breach).[7]

Therefore, under what conditions does a breach of contract also constitute an expropriation of the investor’s contractual rights and, thus, a violation of the applicable investment treaty? The primary threshold, and arguably the highest one, is to ascertain the state’s sovereign capacity in its breaching conduct.

Sovereign capacity versus commercial capacity

The requirement for the state entity to have acted in a sovereign capacity in its breach of contract (acta iure imperii) for a claim of expropriation of contractual rights to be considered has been repeatedly confirmed by arbitral tribunals. Elaborating on this point:

  • It is necessary for the state to have acted beyond its role as a simple party to the contract and in exercise of the particular powers of a sovereign (Azurix).[8]
  • It is required that the state as a contracting party behaves in an out-of-the
  • ordinary manner, and instead acts on its ‘superior governmental power’ interfering with the execution of the contract. The state’s reliance on its own political structure to avoid its contractual obligations; the state asking for amendments in the contract’s economic equation upon change of government; and the contract’s termination through a decree issued pursuant to an emergency law, are considered examples of exercise by the state of public authority (Siemens).[9]
  • When the state party exercises a contractual right and does so in compliance with the contractual framework and governing law, its action will be probably considered as within its mere commercial capacity (acta iure gestionis). For example, the state’s termination of the contract and the call of the performance bond are purely contractual actions, that any reasonable private party would take in response to a contractor’s deteriorating financial situation and the threats of its shareholders to terminate the agreement (Suez).[10]

Sovereign right to regulate

It is a customary law principle that a state has the sovereign right to regulate its domestic affairs.[11] Although the exercise of this right is not limitless, the state will normally have no responsibility for any deprivation or interference caused to foreign investors due to such actions.[12] Indeed:

  • The adoption of general regulations by a state which are ordinarily accepted as within its police powers, will not amount to an expropriation,[13] especially absent any proof of error or impropriety. Whether a state has ‘crossed the line’ between a regulatory activity and expropriation is up to each tribunal to decide. For instance, a banking regulator’s imposition of forced administration did not expropriate the bank’s shareholders’ rights, but was a permissible and lawful regulatory activity following the affected bank’s failure to comply with banking legislation (Saluka).[14]
  • The tribunal will also take into account the political, social and economic circumstances surrounding the state’s conduct, and the severity thereof. In Saluka, discussed above, the tribunal took into account the then prevailing banking crisis. Also, the renegotiation of public contracts; the introduction of new taxes, and the imposition of limitations on bank accounts, were considered as general measures taken within the police powers of Argentina within the context of and in response to its 1998–2003 financial crisis (Suez).[15]
  • The nature of the state’s conduct will be determined by the effect it has on the investor. According to the sole effects doctrine,[16] the state’s disclaimers as to its purpose or intent in good faith when taking a measure will not legitimise its conduct as regulatory (Vivendi 1),[17] unless differently provided in the applicable investment treaty (Siemens).[18]

Tribunals have agreed that the state party’s mere non-performance of or non-compliance with its contractual obligations does not amount to expropriation of the investor’s respective contractual rights

Typical examples

The typical situations involving a foreign investor’s claim for expropriation of its contractual rights are considered below.[19]

Contract termination

Does the unilateral termination of a contract by the state party constitute an expropriation of the investor’s contractual rights, or is it simply an exercise by the state of a contractual prerogative? In addition to the acta iure imperii condition, tribunals have commented that:

  • the exercise by the state of an existing contractual right or remedy cannot in itself exclude the possibility that its action expropriates the investor’s rights, especially if such exercise is found to be unlawful (Suez);[20]
  • to determine whether termination was legitimate and reasonable, it is necessary to examine the conditions under which the contract was entered into, performed and terminated, including non-contractual motives that might have led to termination (Vigotop);[21]
  • if the state terminated the contract for public policy reasons, the state acted in a sovereign capacity, and termination solely for such reasons would constitute expropriation (Vigotop);[22]
  • if the state invoked contractual reasons for terminating the contract, it should be examined whether these were sufficiently well-founded. If not, they may be regarded as mere pretexts in the state’s attempt to conceal an expropriatory conduct (Vigotop);[23]
  • if contractual grounds are in fact established, it should be ascertained whether termination was bona fide. The exercise of this right by the state only to avoid its obligation to compensate the investor under the applicable investment treaty would be abusive and therefore expropriatory (Vigotop).[24] Similarly, termination would be expropriatory,
  • if found disproportionate compared to the contract’s overall benefit to the parties, or if established that it was politically motivated (Ampal);[25]
  • eventually, the legitimate invocation of contractual grounds for termination by the state would exclude a finding of expropriation, even if public policy reasons were found to coexist (Vigotop);[26]
  • it is the effect of the termination that will be considered, not the state’s intention in terminating. For example, a decree that terminates a contract is a permanent measure, which, if not revoked or allowing for an alternative arrangement, will amount to expropriation (Siemens).[27]

Contractual non-performance

A state authority stops payments to a foreign concessionaire; should non-payment be directly treated as breach of international law? Tribunals have agreed that the state party’s mere non-performance of or non-compliance with its contractual obligations does not amount to expropriation of the investor’s respective contractual rights in and of itself. Tribunals have held:

  • The investor should first address the matter using the prescribed contractual remedies; that is, go to the national court or to arbitration to redress the breach.
  • However, if such a route is foreclosed to the investor, either practically or legally, the state’s conduct might constitute a taking of the investor’s contractual right. In the aforementioned example, expropriation may be found if, apart from being refused payment, the concessionaire was also obstructed by the state and denied its legal remedies. Therefore, if recourse to court is still open to the concessionaire to claim payment, an expropriation claim will not normally be upheld, especially if non-payment was the result of money shortage (business risk) and not of some legislative action (Waste Management).[28]
  • When the state-party’s debt to the investor has not been wiped out by any enacted decree or law, but still exists, and the investor can still claim interest for its late payment in the available forum, it cannot claim that its payment right has been expropriated. All the more so if there is a dispute pending between the contracting parties regarding the amount due (SGS).[29]
  • Therefore, the effect of the state’s non-performance/non-compliance action should be one that prevents the exercise of the right entirely or to a substantial extent. Non-payment not redressed by any means available to the investor satisfies this condition (Waste Management).[30]

Failure to take action

The state has agreed to take a certain action for the wellbeing of the investment; eg, adjustments to the tariff calculation in a concession contract. Should the state’s failure or refusal to take such action amount to the expropriation of the concessionaire’s rights, when the latter is deprived of the tariff income from consumer payments? The tribunal determined:

  • The wording of the applicable investment treaty will outline the expropriatory conduct. The vast majority of BITs talk about measures of expropriation taken by the state. When there is no specific definition in the treaties, a measure is an action towards a specific purpose.
  • A simple omission on the part of the state to take the previously agreed action will not qualify as a measure, unless it can be shown that the state deliberately and carefully decided not to act, and communicated such decision to the affected investor. Only in the latter case, the state’s failure (refusal) to adjust the tariff would qualify as a measure for the purposes of the expropriation claim (Suez).[31]
  • The effect of the state’s conduct on the investment will also be considered. If, despite the refusal of tariff revision, the investor kept control of the concession and retained its management authority, the expropriation claim will be refused (Suez).[32]

Series of measures taken against the investor/investment

The state takes several actions against the investor which lead to the destruction of the investment’s value: adopting an adversarial position against the investor; at the same time, issuing adverse resolutions and fines; then, encouraging the non-payment of the concessionaire’s invoices and/or depriving the investor of all legal recourses available. The investor may then reasonably end up with only one remaining option: to rescind the contract and abandon the investment. Can the investor claim that its concession rights were expropriated?

The tribunal will examine the effect of the state’s overall conduct on the economic viability of the investment. The aforementioned state actions gradually rendered the investor’s payment rights (ie, the benefit of the concession) neutralised and worthless. Therefore, with a constantly falling recovery rate culminating in the concession’s inescapable rescission by the investor, the effect was undoubtedly devastating, completely taking away the economic use and enjoyment of the investment (Vivendi 1).[33]

Construction contracts are qualified investments within the meaning of the ICSID Convention and under the vast majority of BITs.

Expropriation of contractual rights in construction contracts

Construction contracts are qualified investments[34] within the meaning of the ICSID Convention[35] and under the vast majority of BITs.[36] Therefore, the rights of contractors arising out of construction contracts and concessions involving infrastructure projects may be expropriated by the host state.

In the following paragraphs, the general principles discussed above are considered by reference to construction cases where the tribunal applied or adopted such principles when determining whether contractual rights have been expropriated.[37]

RFCC v Morocco: concession contract for the construction of a highway in Morocco

The parties disputed the works’ final accounts. Eventually, the National Construction Authority imposed a late performance penalty on RFCC and called the performance bond. The Italian contractor raised an expropriation claim, arguing that such actions were abusive, disproportionate and unjustified. Morocco counter-argued that the actions were in exercise of the Authority’s contractual rights and justified.

The Tribunal held that, even although a breach of the Italy–Morocco BIT could result from the Authority’s breach of contract,
a contractual breach does not constitute ipso jure and as such a BIT breach (Vivendi 2).[38] The basis of this decision was that a contractual breach constitutes an expropriation, only if it can be established that the Authority went beyond its role as a mere party to the contract, and exercised the specific actions of a sovereign (Azurix, Siemens, Suez).[39] Furthermore, both the penalty and the call should have substantial effects of such intensity, that RFCC’s benefits arising from its rights are reduced or eliminated to a point that their possession is rendered useless (Suez, Siemens, Waste Management, Vivendi 1).[40]

The Tribunal found no proof that the Authority acted in sovereign capacity. The parties’ differences pertained to contract interpretation and contractual liability, which are disputes that do not go beyond a normal disagreement between private contracting parties; therefore, no expropriation was established.[41]

Impregilo v Pakistan [settled]: two contracts for the construction of hydroelectric facilities in Pakistan

The works suffered several delays, and the Italian contractor filed an ICSID claim accusing the Pakistan Authority of frustrating: (1) its ability to carry out and complete the work in a timely fashion; and (2) the contractual dispute resolution mechanism, by failing to appoint a person to chair the dispute resolution board for more than two years. The contractor argued that the Authority’s failure to observe the terms of the contract was tantamount to an expropriation. In its jurisdictional objection, the state argued that the dispute was contractual in nature, denying any expropriation allegations.

The Tribunal held that Pakistan may have breached the contracts without breaching the Italy–Pakistan BIT. The two claims are distinct and should be examined separately, even if they overlap in content (Vivendi 2).[42] The basis of this determination was that only in the exercise of ‘puissance publique’ could the actions of the Authority amount to measures having an equivalent effect to expropriation (Azurix, Siemens, Suez).[43] Therefore, if the Authority breached the contract as a result of regular contractual performance and implementation, such breach could not amount to an expropriation. Like in RFCC, the effect of Pakistan’s actions against Impregilo was also highlighted by the Tribunal as a requirement for finding expropriation.

ADC v Hungary: concession contract for the design, construction and operation of the Budapest Airport

Hungary issued a governmental decree for the restructuring of the national airport operations, pursuant to which privatisation of airport operations was prohibited. The contract was consequently terminated; the national airport authority took over the airport operation and ADC had to leave. In its expropriation claim to ICSID, the Cypriot concessionaire argued that its rights under the contract had been rendered worthless and disappeared. Hungary responded that ADC only had contractual claims; that its actions were within its sovereign right to regulate its domestic affairs in view of its impending European Union accession; and that the investor had assumed regulatory risk.

The Tribunal held that the termination of the contract pursuant to the issuance of a government decree is a result of the exercise by the state of its sovereign powers (Azurix, Siemens).[44] Furthermore, it noted that Hungary does have an inherent sovereign right in self-regulation; however, such right is limited by the state’s international treaty obligations.[45] The difference between this position and the one adopted in Saluka,[46] is that in the latter there was a banking crisis involving a continuously failing bank; the intervention of the banking regulator was deemed necessary for the benefit of the general welfare. In ADC it was found that Hungary simply aimed to restructure an otherwise healthy sector, with no obvious benefit to the public.

In any case, foreign investors do not accept any potential risk when making an investment; therefore, they cannot be presumed to have accepted a priori every change in the regulatory regime.[47]

The Tribunal held that ADC rightly presented a treaty claim, since termination resulted from exercise by the state of its sovereign powers. The termination could not be justified for regulatory purposes either; so ADC’s concession rights were indeed expropriated.[48]

Bayindir v Pakistan: highway construction contract in Pakistan

The work started falling behind schedule, but the parties could not agree who was to blame. Eventually, the Pakistani Highways Authority served a notice of termination to the Turkish investor, Bayindir demanding they vacated the site. Bayindir filed an ICSID claim arguing that Pakistan expropriated its contractual right of payment for the work executed until the termination and expulsion. Pakistan responded that it acted reasonably in exercise of its contractual rights, and that, in any case, Bayindir’s claims were limited to the contract itself and could not amount to a breach of the Pakistan–Turkey BIT.

Agreeing with previous tribunals, the Tribunal held that a breach of contract and a breach of treaty are two distinct questions initiating two separate examinations (Vivendi 2).[49] For expropriation to be found, the Authority’s conduct should result from exercise of sovereign powers (Azurix, Siemens, Suez).[50] On the other hand, the exercise by Pakistan of a contractual right or remedy could not exclude in and of itself the possibility of the BIT being breached by the state (Suez, Vigotop).[51] Particularly, the Authority could have potentially expropriated Bayindir’s contractual rights by exercising its own contractual rights, if: (1) Bayindir’s rights were not limited by the state’s rights; or (2) such contractual rights were exercised in breach of the contract terms.[52] The existence of legitimate contractual grounds to terminate Bayindir, would invalidate its expropriation claims. To confirm the existence of contractual grounds it would be necessary to examine the conditions linked to the interpretation and performance of the contract (Vigotop).[53]

Disregarding the state’s intent, the Tribunal also underlined the importance of the economic effect of the state’s conduct. It should be of such intensity that the economic value of use, enjoyment or disposition of the investor’s rights have been destroyed or neutralised (Suez, Siemens, Waste Mananagement, Vivendi 1).[54]

It was found that Bayindir’s expulsion was the consequence of its poor performance, therefore the state’s exercise of its termination right was justified and within the contract’s ambit.[55]

Parkerings v Lithuania: contract for the design, construction and operation of a public parking in Vilnius municipality

Parkerings’ local subsidiary, BP, faced several challenges during project performance (eg, passing of law restricting the municipality’s power to contract with private entities; enactment of decree limiting the municipality’s authority in enforcing parking violations). The contract was eventually terminated by the municipality only five years after its conclusion. In its ICSID claim against Lithuania, Parkerings argued that the termination was wrongful, destroying the value of BP and, therefore, expropriating Parkerings’ ownership interest in its subsidiary. The state responded that the termination was contractually admissible; that Parkerings ignored the jurisdiction of the Lithuanian courts as the contractually chosen dispute resolution forum; and that Parkerings was not deprived of its investment, since BP was still under its ownership and control while still operating in Lithuania.

The Tribunal confirmed that the state’s actions should result from the exercise of its sovereign power, going beyond the actions a simple contracting party would have taken (Azurix, Siemens, Suez).[56]

Nevertheless, it agreed that an investor must first address a breach before the contractually chosen forum (here, the Lithuanian courts), before raising an international expropriation claim. If it is demonstrated that the investor was denied, practically or legally, the possibility of seeking remedy, then the Tribunal might decide whether international rights have been violated on the basis of the treaty (Waste Management).[57]

Moreover, the state’s conduct should be one that gives rise to substantial decrease of the investment’s value (Suez, Siemens, Waste Management, Vivendi 1).[58]

The Tribunal rejected Parkering’s claim, as there was no proof that the municipality used its sovereign authority in terminating the contract.[59] Furthermore, the investor had the opportunity to raise its claim to the Lithuanian courts, and there was no proof of any objective reason for not having done so prior to raising a treaty claim.[60]

Saipem v Bangladesh: gas pipeline construction contract in Bangladesh

A contract was signed between Saipem and Bangladesh’s Petrobangla. A dispute arose when Petrobangla failed to pay Saipem some additional costs. Saipem referred the dispute to ICC arbitration as per the contract, which ruled in its favour. Meanwhile, Petrobangla repeatedly attempted to disrupt the ICC process. It then asked the State’s Supreme Court to set aside the ICC arbitral award. Indeed, the award was set aside as ‘non-existent’.

Saipem filed an expropriation claim to ICSID, accusing both Petrobangla and the Court of having deprived it of its contractual rights to arbitration and to the arbitral award. Bangladesh argued that the Court, as court of the seat of the ICC arbitration, had the power to revoke the ICC tribunal’s authority, and that the award was erroneous. Also, that Saipem should have first exhausted the available local remedies before raising the ICSID claim, if it wished to dispute the revocation.

The exercise by the state party of its sovereign powers constitutes a conditio sine qua non for the tribunal to establish expropriation of contractual rights

The Tribunal held that according to the wording of the Italy-Bangladesh BIT, Saipem’s residual contractual rights under its investment as crystallised in the ICC award were the investment capable of being expropriated.[61] Moreover, it reaffirmed that only acts of the government that cannot be performed by private parties can amount to an expropriation.[62] [Azurix, Siemens, Suez] Therefore, the interference of a state’s judiciary with an arbitration agreement could constitute expropriation of the investor’s contractual rights (judicial expropriation),[63] if it caused the investment’s confiscation.[64] However, this particular type of expropriation additionally required the element of illegality; otherwise any national court setting aside an arbitral award could be accused of expropriation, even if ordered on legitimate grounds.[65]

In any case, contrasting the principle set in Waste Management and SGS, an investor does not have to exhaust the legal remedies available to it domestically before raising an international investment claim; expropriation by a court does not necessarily presuppose a denial of justice.[66]

The Tribunal eventually held that Petrobangla’s collusive actions with regards to the ICC proceedings, whether justified or not, did not constitute an expropriation, as it was not acting in a sovereign capacity. However, by setting aside the arbitral award, the Court, abused its supervisory jurisdiction over the arbitration process, and interfered with it contrary to the NYC article II;[67] a non-existent award cannot be performed anywhere.[68] The Court did expropriate Saipem’s contractual rights to payment, as such were crystallised by the ICC arbitral award.

Malicorp v Egypt: concession contract for the construction and operation of an international airport in Egypt

Nearly a year after its signing, Malicorp was notified that the contract was terminated. The British investor filed an ICSID claim, arguing that Egypt had expropriated its rights conferred by the concession to operate the airport, to use allocated lands and to benefit from the transfer of ownership of a land adjacent to the construction site. Egypt claimed it had valid contractual grounds to terminate (lack of progress), but Malicorp contested such grounds as ‘merely political pretexts’ to conceal an expropriatory conduct amid a change in governmental policy on airport development.

The Tribunal confirmed that in view of a contractual claim the affected party should first try to resolve the matter using the available contractual remedies, before seeking investment treaty protection (Waste Management, SGS).[69] Nevertheless, termination by the state could potentially amount to expropriation, if there is no legitimate supporting contractual basis (Suez, Vigotop),[70] which will be determined based on grounds presented by Egypt pertaining to the conclusion and the performance of the contract by Malicorp (Vigotop).[71]

Malicorp’s misrepresentation of its financial stability on the conclusion of the contract[72] and its failure to launch the project[73] were held ‘sufficiently plausible’ and not pretextual; so Egypt’s conduct was not expropriatory.[74]

Convial v Peru: 30-year concession contract for the construction and operation of an expressway in Callao municipality

Following certain schedule overruns, the contract was unilaterally terminated by the municipality only six years after its conclusion. According to Convial’s subsequent ICSID claim the termination was in abuse of its sovereign power, depriving the investor of all its rights over the concession, including its right to payment for work performed. Peru argued that, due to Convial’s failure to complete the project in a timely manner, project continuation was no longer in the public interest. Termination was, therefore, a contractual prerogative, legitimately exercised by the municipality.

According to the Tribunal, in the absence of exercise of sovereign power by the state, no expropriation claim can be upheld (Azurix, Siemens, Suez).[75] However, contrasting the position held in Vigotop, contract termination for reasons of public interest is not necessarily indicative of exercise of sovereign powers, especially when such right is agreed by the parties in the contract.[76] Since the municipality’s right to unilateral termination for reasons of public interest was specifically agreed in the contract, it merely exercised a contractual prerogative.[77]

Conclusion

The principles and conditions that have been applied by international arbitral tribunals in determining whether contractual rights have been expropriated under various types of contracts, have also largely been applied in cases of rights particularly arising out of construction contracts.

The exercise by the state party of its sovereign powers constitutes a conditio sine qua non for the tribunal to establish expropriation of contractual rights, particularly in cases of termination of the construction contracts.

Although the threshold in support of such claims seems to be high, it is reassuring that there is some protection available to contractors under international investment treaties, considering in particular the constantly growing market challenges and project risks affecting the construction industry (eg, increased project value and complexity; demand of greater resources; greater state interaction and interference; increased pricing; and currency volatility). Nevertheless, pure business risks are not protected by international investment treaties.

Having regard to the cases discussed above, contractors should consider the following points:

  • Ensure that an investment treaty is applicable to the project; that both the contractor’s business activities and in particular, its contractual rights are considered qualified ‘investments’ under the relevant treaty; and that the same are protected against expropriation.
  • Check the treaty provisions regarding the requirements for state conduct to amount to expropriation. Particularly, if the treaty specifically distinguishes the measures amounting to expropriation from the regulatory measures taken within the state’s sovereign right to legislate.
  • Even if a state’s conduct would appear to be within the state’s inherent sovereign power of self-regulation, a contractor should not be discouraged from pursuing its claim. Self-regulation is limited by the state’s international treaty obligations, and the contractor may still argue its case based on the particular conditions of the breach.
  • Check whether the contract specifically allows the host state unilaterally to terminate the contract for public policy reasons.
  • Much will depend on the prevailing surrounding circumstances (eg, a prevailing financial crisis) and the state’s wider conduct. Tribunals have shown that they will consider whether the state’s conduct, despite being legitimate (under law or contract), was abusive or disproportionate.
  • Much will depend on the tribunal’s school of thought. For example, supporters of the sole effects doctrine will not take into account the state’s purpose or intent in taking the allegedly expropriatory measure.
  • Similarly, some investment tribunals may reject the contractor’s investment claim if the contractor did not first try to address and solve the dispute by exhausting the available contractual remedies.
  • Finally, contractors attempting to enter a foreign market are in no way presumed to have accepted a priori every change in the regulatory regime of the host state. Some of these changes may be the ground for an expropriation claim based on the applicable investment treaty.

Bibliography

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Organisation for Economic Co-operation and Development (OECD), ‘ “Indirect Expropriation” and the “Right to Regulate” in International Investment Law’ (2004) OECD Working Papers on International Investment 4/2004, OECD Publishing, https://doi.org/10.1787/780155872321, accessed 28 September 2020.

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Table of cases

ADC Affiliate Ltd and ADC & ADMC Management Ltd v Republic of Hungary, ICSID Case No ARB/03/16), Award (2 Oct 2006).

Ampal-American Israel Corporation and others v Arab Republic of Egypt, ICSID Case No ARB/12/1, Decision on Liability and Heads of Loss (21 Feb 2017).

Azurix Corp v The Argentine Republic, ICSID Case No ARB/01/12, Award (14 Jul 2006).

Bayindir Insaat Turizm Ticaret Ve Sanayi AS v Islamic Republic of Pakistan, ICSID Case No ARB/03/29, Award (27 Aug 2009).

Compañiá de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/3, Award (21 Nov 2000).

Compañiá de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/3, Decision on Annulment
(3 Jul 2002).

Consortium RFCC v Royaume du Maroc, ICSID Case No ARB/00/6, Award (22 Dec 2003).

Convial Callao SA and CCI – Compañía de Concesiones de Infraestructura SA v Republic of Peru, ICSID Case No ARB/10/2, Award
(21 May 2013).

Impregilo SpA v Islamic Republic of Pakistan, ICSID Case No ARB/03/3, Decision on Jurisdiction (22 Apr 2005).

Malicorp Ltd v The Arab Republic of Egypt, ICSID Case No ARB/08/18, Award (7 Feb 2011).

Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No ARB/05/8, Award
(11 Sept 2007).

Saipem SpA v The People’s Republic of Bangladesh, ICSID Case No ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures (21 Mar 2007).

Saipem SpA v The People’s Republic of Bangladesh, ICSID Case No ARB/05/07, Award
(30 June 2009).

Salini Costruttori SpA and Italstrade SpA v Kingdom of Morocco, ICSID Case No ARB/00/4, Decision on Jurisdiction (31 Jul 2001).

Saluka Investments BV (the Netherlands) v the Czech Republic, UNCITRAL, Partial Award
(17 Mar 2006).

SGS Société Générale de Surveillance SA v Republic of the Philippines, ICSID Case No ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction (29 Jan 2004).

Siemens AG v The Argentine Republic, ICSID Case No ARB/02/8, Award (17 Jan 2007).

Southern Pacific Properties (Middle East) (SPP) Ltd v Arab Republic of Egypt, ICSID Case No ARB/84/3, Award (20 May 1992).

Suez, Sociedad General de Aguas de Barcelona SA and Vivendi Universal SA v Argentina, ICSID Case No ARB/03/19, Decision on Liability (30 Jul 2010).

Vigotop Ltd v Hungary, ICSID Case No ARB/11/22, Award (1 Oct 2014).

Waste Management, Inc v United Mexican States, ICSID Case No ARB(AF)/00/3, Award
(30 Apr 2004).

Table of conventions and treaties

Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (The New York Convention).

Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (ICSID Convention).

International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts (2001) (ILC Articles).

 

* This article is based on the author’s dissertation submitted to the King’s College of London as part of her assessment for the Construction Law and Dispute Resolution MSc course.

[1] International Centre for Settlement of Investment Disputes (ICSID); Energy Charter Treaty (ECT); North American Free Trade Agreement (NAFTA); Bilateral Investment Treaty(-ies) (BIT(s)).

[2] Giorgio Sacerdoti, ‘Bilateral Treaties and Multilateral Instruments on Investment Protection’ (1997) 269 Collected Courses of the Hague Academy of International Law 381.

[3] Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn. Oxford University Press 2012).

[4] ILC, ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts’ (2001) UN Doc A/56/10, Arts 4, 7, 31, see https://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf, accessed 29 June 2020

[5] Jeremy Glover, ‘International Procurement, Development Bank Procurement and FIDIC’ (2008) Fenwick Elliott, see www.fenwickelliott.com/sites/default/files/International%20procurement%2C%20development%20bank%20procurement%20and%20FIDIC.pdf, accessed 12 July 2020.

[6] Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice (Oxford University Press 2011).

[7] Compañiá de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/3, Decision on Annulment (3 Jul 2002) [Vivendi 2] paras 95–96.

[8] Azurix Corp v The Argentine Republic, ICSID Case No. ARB/01/12, Award (14 Jul 2006) para 315.

[9] Siemens AG v The Argentine Republic, ICSID Case No ARB/02/8, Award (17 Jan 2007) paras 248, 253, 254–260.

[10] Suez, Sociedad General de Aguas de Barcelona SA and Vivendi Universal SA v Argentina, ICSID Case No ARB/03/19, Decision on Liability (30 Jul 2010) para 154.

[11] Marco Bollini and Virginie Colaiuta, ‘Expropriation of Contractual Rights’ in Renato Nazzini (ed), Transnational Construction Arbitration: Key Themes in the Resolution of Construction Disputes (Informa Law from Routledge 2017).

[12] OECD, ‘ “Indirect Expropriation” and the “Right to Regulate” in International Investment Law’, (2004) OECD Working Papers on International Investment 4/2004, OECD Publishing, see https://doi.org/10.1787/780155872321 accessed 28 September 2020.

[13] Saluka Investments BV (the Netherlands) v the Czech Republic, UNCITRAL, Partial Award (17 Mar 2006), para 262.

[14] Saluka (n 13) paras 264, 269–275.

[15] Suez (n 10) paras 136, 140.

[16] August Reinisch and Christoph Schreuer, International Protection of Investments: The Substantive Standards (Cambridge University Press 2020).

[17] Compañiá de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/3, Award (21 Nov 2000) [Vivendi 1]
para 7.5.20.

[18] Siemens (n 9) para 270.

[19] Bollini & Colaiuta (n 11)

[20] Suez (n 10) para 155.

[21] Vigotop Ltd v Hungary, ICSID Case No ARB/11/22, Award (1 Oct 2014) paras 313, 327.

[22] Ibid, para 328.

[23] Ibid, para 329.

[24] Ibid, para 330.

[25] Ampal-American Israel Corporation and others v Arab Republic of Egypt, ICSID Case No ARB/12/1, Decision on Liability and Heads of Loss (21 Feb 2017) paras 324-333, 344.

[26] Vigotop (n 21) para 331.

[27] Siemens (n 9) paras 270, 271.

[28] Waste Management, Inc v United Mexican States, ICSID Case No ARB(AF)/00/3, Award (30 Apr 2004) paras 174–177.

[29] SGS Société Générale de Surveillance SA v Republic of the Philippines, ICSID Case No ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction (29 Jan 2004) paras 126–127, 161.

[30] Waste Management (n 28) para 175.

[31] Suez (n 10) paras 141, 142.

[32] Ibid, para 145.

[33] Vivendi 1 (n 17) paras 7.5.26, 7.5.31, 7.5.34.

[34] Salini Costruttori SpA and Italstrade SpA v Kingdom of Morocco, ICSID Case No ARB/00/4, Decision on Jurisdiction (31 Jul 2001) paras 53–57.

[35] Convention on the Settlement of Investment Disputes between States and Nationals of Other States (opened for signature 18 Mar 1965, entered into force
14 Oct 1966) (‘ICSID Convention’) Art 25(1).

[36] Yas Banifatemi and Emmanuel Gaillard, ‘Introductory Note to ICSID: Salini Costruttori SPA and Italstrade SPA v Kingdom of Morocco (Proceeding on Jurisdiction)’ (2003) 42 (3) ILM 606.

[37] The general cases reflected each time in the construction cases are marked with square brackets; eg, [case name].

[38] Consortium RFCC v Royaume du Maroc, ICSID Case No ARB/00/6, Award (22 Dec 2003) para 48.

[39] Ibid, paras 65, 69.

[40] Ibid, paras 67–69.

[41] Ibid, paras 66, 86–87.

[42] Impregilo SpA v Islamic Republic of Pakistan, ICSID Case No ARB/03/3, Decision on Jurisdiction (22 Apr 2005) paras 256–259.

[43] Ibid, paras 260, 278, 281.

[44] ADC Affiliate Ltd and ADC & ADMC Management Ltd v Republic of Hungary, ICSID Case No ARB/03/16), Award (2 Oct 2006) para 304.

[45] Ibid, para 423.

[46] Saluka (n 13).

[47] ADC (n 44) para 424.

[48] Ibid, paras 425, 426.

[49] Ibid, para 137.

[50] Bayindir Insaat Turizm Ticaret Ve Sanayi AS v Islamic Republic of Pakistan, ICSID Case No ARB/03/29, Award (27 Aug 2009) paras 444, 461.

[51] Ibid, para 138.

[52] Ibid, para 460.

[53] Ibid, para 458.

[54] Ibid, paras 443, 459.

[55] Ibid, paras 458, 460-462.

[56] Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No ARB/05/8, Award (11 Sept 2007) paras 443–444.

[57] Ibid, paras 448–452.

[58] Ibid, para 455.

[59] Ibid, paras 445–447.

[60] Ibid, paras 453–454.

[61] Saipem SpA v The People’s Republic of Bangladesh, ICSID Case No ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures
(21 Mar 2007) paras 126–127, 130.

[62] Saipem SpA v The People’s Republic of Bangladesh, ICSID Case No ARB/05/07, Award (30 Jun 2009) para 131.

[63] Reinisch & Schreuer (n 16).

[64] Saipem (n 61) paras 131–132.

[65] Ibid, para 133.

[66] Ibid, para 181.

[67] NYC: The New York Convention 1958.

[68] Ibid, paras 159, 163–169, 173.

[69] Malicorp Ltd v The Arab Republic of Egypt, ICSID Case No ARB/08/18, Award (7 Feb 2011) para 103(c).

[70] Ibid, para 126.

[71] Ibid, para 129.

[72] Ibid, paras 130–137.

[73] Ibid, paras 138–142

[74] Ibid, para 143.

[75] Convial Callao SA and CCI – Compañía de Concesiones de Infraestructura SA v Republic of Peru, ICSID Case No ARB/10/2, Award (21 May 2013) paras 504–508, 511–512.

[76] Ibid, paras 537–539.

[77] Ibid, para 534.

Marianna C Tsatsanifou is an in-house lawyer in Pangaea Consulting Engineers Ltd in Athens, Greece and can be contacted at mariannatsatsanifou@gmail.com.