Compensation for Non-Expropriatory Breaches

Abstract

With the development of globalization, host States have realized the importance of foreign investments to their economic growth. Therefore, for the purpose of attracting more foreign investors, the Countries often provide a number of standards of treatment, which intend to insure a security and stable investment environment. However, as sovereignty, the home States also have the right and responsibility to regulate their public affairs. Thus, it’s inevitable that the governments’ regulatory measures will affect the foreign investments and consequently may result the Investor‐State disputes.
As a traditional treaty violation, expropriation has been of great concern for a long time in international investment arbitration. Nevertheless, in recent few decades, host States began to avoid the occurrence of this kind of breach. But it doesn’t mean that the interests of foreign investors are fully protected. On the contrary, another kind of dispute, “non‐expropriatory breaches”, was brought before the tribunals.
Usually, besides the rules of expropriation, the standards of treatment in a treaty also include fair and equitable treatment (FET), full protection and security (FPS), umbrella clauses, prohibition against arbitrary or discriminatory measures, most‐favor‐nation treatment (MFN) and national treatment (NT). Due to the fundamental difference between expropriation and the above standards, in academia, the States’ measures, which violate any of these standards of treatment other than expropriation, are collectively called the “non‐expropriatory breaches”.
Unfortunately, unlike expropriation, the breach of non‐expropriatory obligations is a contemporary issue that has not yet been discussed in greater depth. This is not only because there are few precedents in international arbitral practice, but also because its study has not drew enough attention from scholars. Meanwhile, since most investment agreements do not provide a comprehensive provision for the compensation of non‐expropriatory breaches, there is still no clear and specific legal basis available to arbitrators and academics. However, it is for these motivations, the author of this dissertation believes, that this topic is worthy of study.
Briefly speaking, the tasks of this article are to clarify what kind of measures are the non‐expropriatory breaches and how to compensate the injured investors in these circumstances. Chapter I begins with the origins of non‐expropriatory breaches in international investment arbitration. Traditionally, a State has an inherent power to regulate foreign investments under customary international law. While, this right is weakened when home Countries conclude investment treaties, in which they agree upon several basic standards of treatment to foreign investors. In consequence, the dilemma arises: on one hand, it has been widely accepted that the reasonable regulatory measures may exempt States from legal liability; on the other hand, the principle, that the wrongful act of a State entails the international responsibility, is also well‐established. And the aforesaid tension is the main source of non‐exporpriatory disputes. For all the follow‐up discussions build on the explanation of this issue, the author decides to deal with it in the first Chapter.
Chapter II introduces the determination of different types of non‐exporpriatory breaches. As mentioned earlier, if the violation of a treaty is other than expropriation, it will be categorized as non‐expropriatory violation. Usually, the corresponding claims are on the basis of the breaches of the following obligations, including FET, FPS, non‐discriminatory or non‐arbitrary treatment, umbrella clause, MFN and NT. Since the breach of the above standards of treatment is the premise of a State’s responsibility, the judgment will certainly determine whether and how the compensation should be paid. Therefore, in the second Chapter, the author specifically discusses the basic characteristics of each standard.
Chapter III explains the standards of compensation for non‐exporpriatory breaches. In general, the valuation of a damaged property by an international tribunal has two stages: determining a legal principle, and then applying the most suitable valuation method to the specific facts. And this Chapter focuses on the first step. Though in international investment agreements there’s no relevant provision regulating this issue, like most arbitral tribunals, the author refers to the customary international law, borrows the legal principles for expropriation, and takes the arbitral practice into consideration. Finally, the author finds that the available compensation standards for non‐expropriatory breaches involves the following items: fair market value (FMV) standard, book value standard, liquidation value standard, and actual loss standard.
Chapter IV considers the question of the calculation methods. Facing with the professionalism of valuation, tribunals usually have to be assisted by economic experts. Meantime, even though the exact amounts of compensation are established by the experts, arbitrators play an essential role in judging the strength and weakness of experts’ opinions, and making an award. Therefore, the recognition of different calculation methods is still a significant legal question. Like many arbitral tribunals, this dissertation develops its study mainly on the basis of the International Valuation Standards methodology. Specifically, the analysis is divided into two parts: first, the valuation methods for the calculation of FMV, including the discounted cash flow method, market‐based approach and asset‐based approach; second, the valuation methods under other compensation standards, including book value method, liquidation value method, and actual loss method.
Finally, since there’s no explicit provision in international investment agreements regulating the compensation for non‐expropriatory breaches, and since the pre‐existing guidance in arbitral practice is very limited and confused, the author believes that it is necessary to make some summarization and recommendation in the end of the dissertation. Accordingly, in Chapter V, the author points out several suggestions around this issue.

Date of Award	10 May 2016
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Zhen Charles QU (Supervisor) & Guiguo WANG (Supervisor)