Nationalization and Expropriation of Natural Resources


In general, only when appropriate local remedies have been exhausted does a company or individual have recourse to international tribunals. In international law, the exhaustion of local remedies is a critical component of diplomatic protection. Under the Hull Formula, a foreign investor is entitled to dispute resolution before an overseas tribunal if the remedies provided by the host state are inadequate. Counter to this is the Calvo Doctrine – which stated that a foreign investor was only entitled to a national treatment standard and was subject to local laws.

The International Law Commission (ILC) adopted Draft Articles on State Responsibility in 2001, attempting to consolidate customary international law. Under the ILC rules, state responsibility may arise when the contracting government acts in breach of contract, legislates to undermine the contract, annuls the contracts, or makes a contract illegal. Mere breach of contract does not create state responsibility, however. Contracts are not treaties, and in general, are subject to the laws under which it was negotiated.

Case Law

Some contracts contain stabilization clauses, where the government agrees not to modify or annul the contract unilaterally. These were found to be generally acceptable under Kuwait v. Aminoil (1982). Still, the tribunal noted that the length of time (in this case, 60 years) must be reasonably limited. The state has legislative power flowing from its sovereignty, and this could not be indefinitely contracted away.

In Barcelona Traction (1970) – The ICJ precluded Belgian stockholders from utilizing the Belgian government to enforce their rights, as the company was incorporated in Canada. When the Canadian government withdrew from the conflict, Belgium could not stand in Canada, even though Belgian citizens owned a majority of the company.

Raytheon-ELSI (1989) – this reinforced the need to pursue local remedies before international remedies are pursued.

Expropriation of Alien Property

International law recognizes alien property’s expropriation as lawful if prompt, adequate, and effective compensation is provided. Expropriation is based on the principle that foreign owners should be accorded the same rights as nationals but cannot complain if they receive the same treatment as nationals. Thus, if the national receives no compensation for expropriation, then the alien can also expect none.

Under the Hull formula, these payments must be made absent the legitimate exercise of police powers, confiscation for criminal action, taking of enemy property, treaty obligations, and a few other edge case situations. The compensation may be deferred as long as the effective compensation takes place. Many bilateral investment treaties include a compensation rule to define “prompt, adequate, and effective.”

Types of expropriation include:

  • confiscation
  • nationalization – the expropriation of one or more natural resources for general economic reform
  • direct – involves the direct taking and seizure of physical property
  • indirect – when a country takes action that impairs the value of an investment without taking ownership of the investment through taxation, regulation, or forced sale – “When measures are taken by a state the effect of which is to deprive the investor of the use and benefit of his investment even though he may retain nominal ownership of the respective rights. (Middle East Cement Handling Co v. Egypt (2002))

Key Expropriation Case Law

CDSE v. Costa Rica (2000) – determined that the taking of property is defined as when a “process of administrative and judicial consideration of the issue in a manner that effectively freezes or blights the possibility for the owner reasonably to exploit the economic potential of the property…”

Oscar Chinn (1934) – discriminatory taxation may be permitted and unlawful if it were the primary or sole object of a monopoly regime.

Pope & Talbot v. Canada (2002) – ruled that regulation can be exercised in a way to cause creeping expropriation. However, reduced profits are not the loss of economic benefit or control. Under the Harvard Draft Convention, the standard defines expropriation as interference that justifies an inference that the owner will not use, enjoy or dispose of the property. It requires substantial deprivation.

Ethyl Corporation v. Canada (1998) – found that terms “tantamount to expropriation” in NAFTA treaties are so broad that they give the impression that the treaties intended to widen the scope of taking. Nondiscriminatory regulations in the public interest, such as environmental laws, will rarely be considered expropriation.

Santa Elena v. Costa Rica (2000) – Compensation is payable for any environmental measure which is unlikely to be accepted by developed states and largely mediated Metalclad v. Mexico (2000) where broad environmental allowances were not considered expropriation.

Amoco v. Iran (1987) – Where the country is not a party to the contract, they cannot be held responsible for breach of contract. In the absence of a stabilization clause, a contract does not constitute a bar to nationalization. In calculating damages, the Tribunal looked to Chorzow (1928) and based on the value of property rights and interests affected.

Sterrett Housing v. Iran (1997) – the appointment of a “temporary manager” by the government constituted interference and resulted in an indirect taking. This reinforced the findings in TAMS v. TAMS-Iran (1984), which noted that taking might occur under international law when a state interferes with property and enjoyment of benefits, even when title remains unaffected.

ConocoPhillips v. Venezuela (2013) – found that because the taking was unlawful, the claimant may choose the valuation date – the date of the award or the date of the expropriation.

Human Rights

The right to property is recognized as a human right in many instruments, including the American Convention on Human Rights, the EU Charter of Fundamental Rights, the African Charter on Human and Peoples Rights, and the Universal Declaration of Human Rights.

Expropriation for the exercise of police power and defense measures during wartime is lawful, without compensation. Expropriation, which is part of crimes against humanity, genocide, retaliation, racial bias, is unlawful even with compensation. Nationalization of Expropriation is generally lawful unless compensation is not paid.