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FOREIGN INVESTMENT AND WTO : Measures against expropriation

Vijay Purohit & Manish K. Kanth




Foreign investment has become a burning issue today. World economy is going through a transition phase. Companies all over the world are in search of markets in third world countries. Foreign investment is beneficial for everyone. This increases turnover, there is less dependence on the home conditions of trade and the third world countries also gain profits with out having debt obligations.

Foreign investment not only profits countries, but it also strengthens their ties. Thus, there is a need to protect such foreign investment inflow, which is the topic of this paper.

In order to secure transparent, stable and predictable conditions for long-term cross-border investment, particularly foreign direct investment,.. the WTO-Ministers agreed in Doha on taking up negotiations after the Fifth Ministerial Conference and create a multilateral investment framework that will contribute to the expansion of trade. [1]

Along with promoting investment, BITs (Bilateral Investment Treaties) also thrive to make sure that existing investments are protected, primarily against state interference such as expropriation, currency and exchange controls, war and civil disturbances.[2]


One of the primary goals of a WTO agreement on investment should be to provide strong and effective protection for investors against nationalization, expropriation, and measures tantamount to expropriation.  Protection should be provided both against outright expropriation, as well as so-called creeping expropriation caused by subsequent moves by which the original conditions, under which the investment was made, are changed.  In the event such actions take place, expropriations must be for a public purpose and carried out in a non-discriminatory fashion, and investors must be provided with an acceptable timetable for divestment.  Prompt, adequate and effective compensation should be paid in freely convertible currencies.

A WTO agreement on investment should offer a broad definition of expropriation.  ICC would therefore like to see expropriation standards included in the negotiations.[3]

Before the investors invest into a country, there primary focus is whether there would be risk of expropriation.

A WTO Investment Agreement must deal with this worst-case scenario and provide strong and effective protection against any kind of expropriation or instruments with the same effect.[4]

Expropriation and related measures must be used in a narrow sense, and only when there is an urgent public purpose involved.

It is not sufficient to deal with this question exclusively in the framework of BITs. In order to link every WTO-member with every other member, another 7.500 BITs would have to be negotiated. This means, that at present, a large number of potential host-countries (for example China) cannot guarantee proper protection despite the existence of 1800 BITs.[5]

The WTO Agreement now provides for a clearer definition of expropriation for every member. This is done in order to prevent one member applying stricter disciplines of expropriation, which would in turn be unreasonable on the investors.

The FTA (Foreign Trade Association) strongly encourages the WTO to complete the list of negotiated items by adding the two important aspects: protection against and definition of expropriation.[6]

Now, most of the service companies are advocating for investment in various new sectors, provided there is a strong protection against expropriation. As Leon Brittan, former EU Trade Commissioner and now a service industry lobbyist, said in a letter to the UK Government before Cancun, We hope that the EU will not accept an investment agreement which deals solely with market access and not investor protection. Such an agreement would hold little attraction for service industries, given that GATS already provides for market access for service industries under Mode 3, but not for investor protection.[7]

BITs can thus curb the indirect forms of expropriation viz. the creeping expropriation, as well as the regular takings. They also provide for compensation in case of any civil insurgencies/war or National Treatment/ MFN Treatment. In addition, the common inclusion of a provision on subrogation permits a state who has paid an indemnity to one of its investors to take over all rights and claims of that insured investor and to receive the same treatment as the investor would have received.[8]



Till this period the European Commission was reluctant to establish mechanism against expropriation in a multilateral investment agreement.

The logic given was, since there were adequate measures in the Bilateral Treaties, there would be no need to incorporate the same in Multilateral Agreements. But, in todays trade scenario, it is incumbent to include measures against expropriation in such agreements. But after that, looking at the importance of investment protection and the magnum of European investors investing abroad, the EC has also decided to create a regulatory framework for expropriation in such multilateral agreements.

At the moment, the WTO working group on Trade and Investment has been asked to work out the content and scope of the agreement. After the ministerial conference in Cancun, the WTO states were to enter into negotiations to clarify the details. Through constructive talks with the decision-makers, the FTA is working towards ensuring that its resolution is taken into consideration during the negotiation and will submit position papers and written opinions aimed at safeguarding the interests of European trade.[9]



Art. 22 of the Doha Ministerial Declaration call for modalities for pre-establishment commitments based on a GATS-type, positive list approach. This means that foreign investors cannot invest in the host-country, unless the said sector is enlisted in a positive list.

It is pertinent to note that though countries do look forward to investment inflow, but it is difficult to decide upon a positive list, as compared to exclusion of some sectors in a negative list. The sectors open to foreign investment in a positive list are few and they take time in further developments. This is detrimental in inviting of investment. It can lead to formation of protectionist policies and will create a further gap between the developed countries that are well versed with the traits of investment and developing countries that are trying to open up their markets. Presently open sectors will be closed in order to further create a positive list. These kinds of protectionist policies give rise to measures such as expropriation when the sectors are close, and countries take actions against investors in a closed sector.

Countries can decide upon the sectors they wish to open. They can completely prohibit the sectors in which they dont want investment. This will encourage investors to invest in the open sectors and will decrease the threats of expropriation.



Taking away the property of a foreign national, firm or a company may be defined as expropriation. It may be for a public purpose. Hence, the term is complementary to the word nationalization. Article 10(3) of the Harvard Draft defines a taking of property as not only including an outright taking of property but also any unreasonable interference with the use, enjoyment, or disposal of property so as to justify the inference that the owner thereof will not be able to use, enjoy or dispose of the property within a reasonable period of time after the inception of such interference. Further, a taking of the use of property includes not only an outright taking of the use but also any unreasonable interference with the use or enjoyment of property for a limited period of time.[10]

According to a generally accepted principle, an expropriation is not necessarily unlawful even when the action imputable to the State is contrary to international law.[11] In determining whether a particular interference with business activities amounts to an expropriation, the test is whether that interference is sufficiently restrictive to support a conclusion that the property has been taken from its owner.[12]

No party may directly or indirectly nationalize or expropriate an investment of an investor of another party in its territory or take a measure amounting to expropriation of such an investment.[13]

The GATS (General Agreement on Trade & Services) is based on the discredited MAI (Multilateral Agreement on Investment), which in turn was based on an already existing treaty between Canada, the US and Mexico, called NAFTA, the North American Free Trade Agreement.

NAFTA, Chapter 11 provides that:


Article 1110: Expropriation and Compensation: No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (expropriation), except:

(1)  For a public purpose;

(2)  On a non-discriminatory basis;

(3)  In accordance with due process of law and Article 1105(1); and

(4)  On payment of compensation in accordance with paragraphs 2 through 6.[14]

In the year 1997, the Canadian Parliament banned the import & inter-province transport of an American company Ethyl Corporations product, MMT, a gasoline stabilizer created in order to replace lead. Canada was of the opinion that the said MMT was a threat to their public health as well as environment.

Ethyl subsequently filed a suit of $251 million claiming that the said ban was violative of the principles of NAFTA. It claimed a restitution of $251, claiming the said ban to come under the purview of expropriation of their plant, as enshrined under NAFTA. It also claimed the aforesaid amount causing loss of reputation.

Under the new dimension given to the definition of expropriation by the WTO, any country can challenge expropriation done to protect forests or in order to serve a public purpose.

Ethyl also claimed that the legislative debate generated caused a tremendous loss of reputation to the company. Thus, the Canadian Parliament reverted back on its stance and struck down two legislations and paid a sum of $13 million to Ethyl for constructive potential loss of their business. Expropriation is a part of customary international law and there have been many instances in the past of expropriation.

NAFTA has introduced a new dimension into this concept. It is the first treaty that allows multinational companies to sue host governments. Under the normal course of arbitration, dispute settlements involve individual claiming from individual or a country claiming from another country on behalf of its nationals. Expropriation is construed to be much narrower in International Law than some of the domestic laws relating to expropriation (including USA). There is a huge difference in the application of expropriation under the NAFTA as compared to some of the International cases, such as the US-Iran claims tribunal. Under international law, government regulations designed to protect the public interest in terms of health, safety, and environmental standards would not be threatened. Indeed, under international law, the investment must be rendered virtually valueless, while any regulation that is likely to impact on a companies profit is being litigated under the NAFTA.[15]

Expropriation under WTO would lead to a different aspect altogether. Companies would be able to sue governments if the investing system is not in their favour. They would want a completely risk free environment for investment which would yield them rich dividends. Thus, we can adduce that expropriation claims have attained a completely different magnum.

Expropriation can be enforced in legal terms by the WTO tribunal and that will over ride any domestic institution. The tribunal will appoint three independent judges who are not possessive of the information as regards the country of origin and the conditions thereof.  The country upon which expropriation is alleged has a right to present its defence but the internal communities of the country cannot do so. Since, the country has agreed to WTO principles, it has a right of defence but the communities, for the benefit of whom the country might have taken that expropriation measure, cannot represent them. Expropriation cannot be arbitrated under the WTO dispute settlement mechanism. Both the EU and USA have attempted to get investment into the WTO but have been unsuccessful. Indeed the push for an investment agreement in the WTO was part of the reason for the failure of the Cancun Round; developing countries strongly resisted the attempt by developed countries to put the Singapore Issues, which included investment, on the agenda. Thus, investment and the issues of Expropriation and Compensation do not come within the ambit of the WTO.

This is a particularly important point in the context of the proposed AUSFTA, as this opens up a whole new field for Australia, and the concerns on sovereignty.[16]


State to state dispute resolution in the WTO (Investment clause as proposed by the EU)

It proposes rules on direct and indirect expropriation in order to provide a protection to the investors. The basic difference between this agreement and GATS is with respect to rules relating to indirect expropriation.

State to state dispute resolution in the WTO (Under GATT)

No rules on indirect expropriation, but all GATS rules affect new government regulations that impact adversely on a companys investment, in a sector where a commitment has been made. For example, under the GATS Article XVII it is prohibited to put barriers to trade with regards to market access which will harm the investors in an arbitrary manner.


The WTO Agreement thrives only for urging countries to bring their laws and regulations in consonance of the Agreement. The room for compensation is more often restricted to a voluntary basis and not a mandatory requirement. Also, there is no provision for repatriation of foreign investment if there has been an expropriation of the same. Thus, the current WTO framework is void of strong protection for investors and for matters relating to expropriation.

Very often, governments have been subject to challenge from investors who claim that their profits have been slashed due to these measures of expropriation taken by governments.  Environment protection and expropriation have also been subject to a lot of hue and cry. The US Company Metalclad had sued Mexican authorities for expropriation of a toxic-waste the company had produced. These issues under the NAFTA have demonstrated the line of conflict between investment protection and environmental policies.

In the last 20-30 years there has been a reduction in direct expropriation of foreign investment. My preposition is that there must be a stop on illegal expropriation in the current WTO regime so as to facilitate investment.

Expropriation clause and dispute settlement must be done effectively in order to prevent these problems.


Authors are the 5th year students of Gujarat National Law University, Gandhinagar.

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