Understanding Indirect Expropriation in Ethiopian BITs

Indirect Expropriation in Ethiopian BIT’s. The content discusses the concept of indirect expropriation within Ethiopian Bilateral Investment Treaties (BITs) and highlights the tension between attracting foreign direct investment (FDI) and maintaining state regulatory powers. It explains that unclear distinctions between regulatory measures and indirect expropriation hinder the ability of host states like Ethiopia to implement legitimate regulations without fear of investor claims. The article contrasts lawful and unlawful expropriation, emphasizing the significance of proper compensation, rooted in the Chorzów Principle. Furthermore, it examines implications for state sovereignty and the need for clearer definitions in BITs to balance investor protection with regulatory autonomy.

Introduction to Indirect Expropriation in Ethiopian BIT’s

International Investment Agreements (IIAs) are well termed as “double-edged swords”: while they can be used as instruments to attract FDI,¹⁹⁴ they restrain host states’ policy space in exercising their legitimate regulatory powers. In most IIAs there are no clear boundaries between non-compensable regulatory measures and measures that lead to an “indirect expropriation”. In fact, the desire of contracting states to be perceived as attractive investment destinations or to gain the maximum protection for their national investors investing abroad, meant States failed to foresee the importance of leaving policy space for themselves.  

The police (regulatory) powers doctrine

The police (regulatory) powers doctrine is closely linked to the international public law concept of state sovereignty. State sovereignty is the state’s attribute to realize its tasks both on its territory and in international relations independently from others.” 

According to supporters of the police powers doctrine, the scope of the states’ sovereignty is reduced, and their regulatory functions are weakened with every signed IIA, which should be balanced by accepting states’ right to regulate in the public interest. Individuals should not have such a wide scope of liberty in the control and management of their property as not to be subject to laws and regulations adopted by sovereign states.

The idea may be sketched from Vattel and his simple example:

“if a country has too many vineyards and is in need of grain, sovereign may forbid the planting of vines in fields which can grow grain, for here the public welfare and the safety of State are concerned.” 

The notion that states must be free to exercise their police powers and thus that measures taken within this area of activity should be excluded from the expropriation sphere has been widely recognized under international law. The closer meaning of the exception and the type of public purpose activities that are included in the police powers of a state are however matters seriously disputed.

Expropriation clause In Ethiopian BIT’s

In all Ethiopian BIT`s expropriation clause, except those BITs which are concluded with. Qatar, United Arab Emirates &. Brazil, there are no clear yardsticks which distinguishes “indirect expropriation” from non-compensable regulatory power of the state. This leads for investors claiming any reasonable breach of. BITs under this catch all phrase “indirect expropriation” claim and to make it worse in the absence of clear criteria in the BITs, the arbitrators are free to determine the issue based on any standards, which might adversely affect the host state Ethiopia.²⁰¹  

As things goes, even a measure which is pursued purely for legitimate purpose and bona fide regulatory measures like public health, tax, protection of antiquities, environment and safety might be constituted as “indirect expropriation”. This again leads to regulatory freezing effect for fear of possible violation of BITs obligations. Thus, the absence of hard and fast yardstick makes the whole process unpredictable.

Definition of Indirect Expropriation in Ethiopian BIT’s  

In general, expropriation applies to individual measures taken for a public purpose while nationalization involves large-scale takings on the basis of wide measures of social and economic reform.  Many former colonies regarded nationalizations as an integral part of their decolonization process in the period following the end of the Second World War.  

Expropriation and nationalization in reliant on the extent of the host state

Sometimes, reliant on the extent of the host state action of seizure, the terms are used interchangeably. Hence ‘expropriation’ of entire industries or sectors of the economy are described by Newcombe and Paradell as ‘nationalization’. 

The Tribunal in the Lauder v Czech Republic case stated that

“In general, expropriation means the coercive appropriation by the State of private property, usually by means of individual administrative measures. Nationalization involves large-scale taking on the basis of an executive or legislative. Act for the purpose of transferring property or interest into the public domain.”  

The Tribunal in the Lauder v Czech Republic case

Standard of compensation in Indirect Expropriation in Ethiopian BIT’s

Expropriation is subject to a different standard of compensation than nationalization. In practice, however. IIAs do not make such a distinction and apply a single set of rules to both expropriation and nationalization. The difference between expropriation and nationalization is thus the degree of the scale and extent rather than their legal nature. All the way through this thesis therefore, the researcher used the term expropriation to describe both forms of taking.

Definition of lawful & unlawful Expropriation  

A vast majority of IIAs allow States to expropriate investments as long as the taking is effected for a public purpose, in a non-discriminatory manner, under due process of law and against the payment of compensation. Hence, the indicated set of criteria constitutes the requirements of lawful expropriation.  It is clear that expropriation becomes illegal or unlawful if these requirements are not duly satisfied.  Especially, the failure to make payment of adequate compensation or recompense to the aggrieved party is generally the most litigious element in state-foreign investor disputes. 

The Importance of Categorizing lawful and unlawful expropriation

The categorization of lawful and unlawful expropriation is important. This is because it determine the extent of compensation. For unlawful expropriation, instead of paying the fair market value of the investment, which is the remedy for lawful expropriations, the. State must usually carry off all the damage caused by its illegal act.

The Chorzów Principle & Indirect Expropriation in Ethiopian BIT’s

The principle of. Chorzów Principle,”  deriving from the 1927 Permanent Court of International Justice (PCIJ). Chorzów Factory judgment, which remains as one of the most significant decisions on compensation under international investment law. 

3.3 The Difference

In 1928, the PCIJ clearly distinguished between the financial consequences of lawful as opposed to unlawful expropriation. While in the case of lawful expropriation. Indeed it is the just price, i.e. the value of the undertaking at the moment of dispossession, plus interest to the day of payment” that must be compensated. Indeed “in case of unlawful expropriation. International law provides for. Restitutio in intergrum. (Restoration of an injured party to the situation which would have prevailed had no injury been sustained.) Or, if impossible, its monetary equivalent at the time of the judgment.”  

3.4 Case Study

In ADC v. Hungary, the tribunal noted that the investment’s value had risen significantly after the expropriation, and therefore considered that:  

The application of the. Chorzow standard requires that the date of valuation should be the date of the. Award and not the date of expropriation. Since this is what is necessary to put the. Claimants in the same position as if the expropriation had not been committed”.  

This approach could not be adopted in the context of a lawful taking where treaties require that the. Investment be valued at the date immediately before the taking. Tribunals later followed this distinction in several prominent cases. Thus today, it is widely accepted that the. Chorzów Factory case created the basis for compensation resulting from unlawful expropriation.

Reading Material on Indirect Expropriation in Ethiopian BIT’s

1. Wolfgang Alschner and Elizabeth Tuerk, The Role of IIAsin Fostering Sustainable Development, (2013) p. 221.
2.  UNCTAD, The Role of IIAs in Attracting Foreign Direct Investment in Developing Countries UNCTAD Series on International Investment Policies for Development, (Geneva, 2012)
3.  Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd ed., 2012)
4.  Indirect Expropriation And Its Effect On State Regulatory Power: In Light Of Ethiopia Bits by Getachew Kebede
5. Lorenzo Cotula, Expropriation Clauses and Environmental Regulation: Diffusion of Law in the Era of Investment Treaties, 2015, p. 279;  
6.  ILC Draft articles on Responsibility of States for Internationally Wrongful Acts, Article 4
7.  Belohlavek, A. J., Rozehnalova, N. “State Sovereignty”, Czech Yearbook of International Law. Netherlands, (2019), pp. 299-301.