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THE LAST STRAW – INTRICACIES OF CREEPING EXPROPRIATION

This essay has been authored by Ananiyasri R from SASTRA University, Tamil Nadu. This essay was one of the Top 7 Honorable Mentions in the 2nd RGNUL-CTIL Arbitration Essay Writing Competition 2023.


INTRODUCTION

The right of a State to appropriate private property for public use is unquestioned, however, the actions taken consequential to the decision of expropriation, categorize the measures as direct or indirect expropriation. A type of indirect expropriation, creeping expropriation refers to “the slow and incremental encroachment on one or more of the ownership rights of a foreign investor that diminishes the value of its investment.”[1] Though the doctrine of creeping expropriation has been rarely applied by the tribunals, the necessity to differentiate it as a separate action to violate the investor’s rights taken by the state arises from the very minute distinction between indirect and creeping expropriation. For creeping expropriation to be particularly identified as so, it must be understood that “creeping expropriation takes place through a series of actions, none of which might qualify as an expropriation by itself, but the aggregate effect of which is to destroy the value of the investment.”[2] A sequence of decisions taken by the state may also be considered as indirect expropriation, however, the loophole in the offence lies in the aftermath of the decisions taken by the host state. The sequence of decisions may on their own, qualify as an act of indirect expropriation, but in the case of creeping expropriation, “a measure or series of measures can still eventually amount to a taking, though the individual steps in the process do not formally purport to amount to taking or to a transfer of title.[3]


AN IDENTITY OF ITS OWN

The initial idea that expropriation, though a single offence may have various intricacies and divisions within it, was pondered and discussed in LG&E V Argentina, wherein the tribunal expressed that expropriation “may show itself in a gradual or growing form – creeping expropriation.”[4] Although it has been established as a concept in various international reports, agreements, and treaties, recognizing an  offence to be that of a creeping expropriation and condemning it proved to be a very trying and time-consuming process for the arbitrators. [A2] Through various cases, even though the tribunal did not establish cases of creeping expropriation owing to the lack of elements necessary to prove the action, they have recognized the concept and have given their definitions and interpretations of the division of indirect expropriation.


“Creeping expropriation is a form of indirect expropriation with a distinctive temporal quality in the sense that it encapsulates the situation whereby a series of acts attributable to the state over a period of time culminate in the expropriatory taking of such property.” is the definition given by the tribunal in Generation Ukraine Inc  v. Ukraine, although the claimant could not establish it in the part of the host state.[5]


In a paper on indirect expropriation, Professor Reisman and RD Sloane recognized creeping expropriation as discrete acts, analysed in isolation rather than in the context of the overall flow of events, may, whether legal or not in themselves, seem innocuous vis-à-vis a potential expropriation. Only in retrospect will it become evident that those acts comprised part of an accretion of deleterious acts and omissions which in the aggregate expropriated the foreign investor's property rights.[6]


COMPOSITE ACTS, THE CRUX OF THE INTRICACY

Tracing the definitions given by various tribunals and authors, it is clear that for an expropriation to be recognized as one of a creeping nature, it has to occur by composite acts.

The tribunal in Siemen v. Argentina, deliberated the concept of creeping expropriation occurring through the passage of composite acts. It stated that creeping expropriation refers to a process, to steps that eventually have the effect of an expropriation.[7] Furthering its view on creeping expropriation, the tribunal sought to strengthen its view by referring to Article 15 of Draft Articles which declares that “the breach of an international obligation by a State through a series of actions or omissions defined in aggregate as wrongful occurs when the action or omission occurs which, taken with the other actions or omissions, is sufficient to constitute the wrongful act”.[8]


Unlawful expropriation in general, is the failure of a host state to honour its obligations to the foreign investor who has invested in their state.Article 15 discusses a breach consisting of a composite act and the definition of creeping expropriation as per the award. From the Articleit is observed that composite acts are the essence of determining an offence to be  creeping expropriation and diversifies indirect expropriation into various divisions. It also helps in identifying and narrowing down the ways in which the host state violated the rights and obligations assured to the investor[A3] . The tribunal also cites the ILC’s Commentary on the Draft Articles and in particular, their view on Article 15. “Paragraph 1 of Article 15 defines the time at which a composite act ‘occurs’ as the time at which the last action or omission occurs which, taken with the other actions or omissions, is sufficient to constitute the wrongful act, without it necessarily having to be the last of the series.” Taking into consideration this view, the tribunal also states that in case of creeping expropriation, “each step must have an adverse effect but by itself may not be significant or considered an illegal act. The last step in a creeping expropriation that tilts the balance is like the straw that breaks the camel’s back. The preceding straws may not have had a perceptible effect but are part of the process that led to the break.” Thus, the Award of Siemens expressly states that each act will have a role in the violation of the obligations made to the investor by the host state.


The tribunal in Biwater v. Tanzania, relying on the Siemens case, stated that “the approach is akin to the accumulation effect that is well-recognised in the specific context of creeping expropriation.” It also “found that the cumulative effect of different acts attributable to the respondent was expropriation.[9]

In Phillips Petroleum V Shutts, the tribunal used the concept of composite acts before Seimens and stated that “in circumstances where the taking is through a chain of events, the taking will not necessarily be found to have occurred at the time of either the first or the last such event, but rather when the interference has deprived the Claimant of fundamental rights of ownership and such deprivation is "not merely ephemeral, or when it becomes an irreversible deprivation.”[10] In Biloune v Ghana[11], the Tribunal applied the concept of composite acts and considered the series of actions committed by the government of Ghana and declared that the government had committed expropriation of the Claimant’s rights and investments.


COMPOSITE OMISSIONS AND THEIR ROLE

While various Tribunals have expressed that composite acts construed the essence of committing creeping expropriation, whether composite omissions can also be considered when establishing creeping expropriation needs to be traced through precedent awards and the views of tribunals in the yesteryear.


In Biloune v Ghana, The Tribunal in its award declared that “it holds that the Government of Ghana, by its acts and omissions culminating with Mr Biloune's deportation, constructively expropriated MDCL's assets and Mr Biloune's interest therein.”[12] This shows that the Tribunal considered both composite acts and omissions while establishing expropriation.


However, the tribunal in Olguin v. Paraguay, a later case was of an opinion that omissions may not constitute expropriation. The tribunal stated that “For an expropriation to occur, there must be actions that can be considered reasonably appropriate for producing the effect of depriving the affected party of the property it owns, in such a way that whoever performs those actions will acquire, directly or indirectly, control, or at least the fruits of the expropriated property. Expropriation therefore requires a teleologically driven action for it to occur; omissions, however egregious they may, are not sufficient for it to take place.[13] The tribunal believes that as indirect expropriation excludes omissions as acts constituting expropriation, then in the case of creeping expropriation all acts constituting a composite act must accordingly be commissions and actions rather than omissions to be considered its subdivision and at the same time embody its crux.


The Eureko[14] tribunal paid special attention to this issue when confronted with the argument that the relevant BIT definition of expropriation contained only the word “measure” without any reference to “omissions.” The tribunal rejected this argument as unreasonably restrictive and reached for a general interpretation of wrongful acts to be found in ILC Articles and concluded that both actions and omissions may constitute a breach of the treaty. However, the view in Olugin would still be able to match the view in Eureko.


In Spyridon Roussalis v. Romania,[15] the Tribunal referred to Biloune with approval and said “Expropriation may occur in the absence of a single decisive act that implies a taking of property. It could result from a series of acts and/or omissions that, in sum, result in a deprivation of property rights. This is frequently characterized as a "creeping" or "constructive" expropriation.” The Tribunal preferred the view in Biloune over Olguin.


However, going by Article 15 which holds both actions and omissions of the State on an equal pedestal, while deciding an expropriation as of a creepy nature, both actions and omissions should be given equal consideration and the possibility of having expropriation through both actions and omissions was confirmed in CME v. Czech Republic, Ena Hotels and Amco Asia Corporation.


CONCLUSION

Tracing the background, evolution, and scope of creeping expropriation, we understand that minute and finite details of facts, actions of the host state and investors and the consequences of their decisions have varying repercussions which through various cases and precedents have evolved and are being dealt in a microscopic view to provide specific reliefs and punishments. The need for a specific sequence of actions and omissions, establishing creeping expropriation becomes a trying task for the tribunals. While observing creeping expropriation as an offence through various awards, it is observed that the nature of offence is undeterminable in ordinary course of arbitration proceedings due to lack of guidelines. Guidelines and working committees dealing with creeping expropriation explicitly, would help determine the offence in a more structured way and also determine the gravity of penalty that needs to be imposed on the state defaulting and committing the offence.


However, the intricacies of this particular type expropriation being identified and dealt with the recent past imbibe the sign of an in-depth development in the international commercial arbitration area and will perhaps, further establish divisions of its kind.


[1] UNCTAD, Taking of Property, UNCTAD Series on issues in international investment agreements, UNCTAD/ITE/IIT/15, 9-10 (2000).

[2] B. H. Weston, “Constructive Takings” under International Law: A Modest Foray into the Problem of “Creeping Expropriation”, 16 Virginia Journal of International Law 103, 109, 148-151 (1975).

[3] Santa Elena S.A. v. Republic of Costa Rica, (ICSID Case No. ARB/96/1)

[4] LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, (ICSID Case No. ARB/02/1)

[5] Generation Ukraine, Inc. v. Ukraine, (ICSID Case No. ARB/00/9)

[6] W. M. Reisman & R. D. Sloane, Indirect Expropriation and its Valuation in the BIT Generation, The British Year Book of International Law 115, 121. (2003)

[7] Siemens A.G. v. The Argentine Republic, (ICSID Case No. ARB/02/8)

[8] Article 15 - Draft Article Responsibility of States for Internationally Wrongful Acts

[9] Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, (ICSID Case No. ARB/05/22)

[10] Phillips Petroleum Co. v. Shutts, 472 U.S. (1985)

[11] Biloune and Marine Drive Complex Ltd. v. Ghana

[12] ibid

[13] Eudoro Armando Olguín v. Republic of Paraguay, (ICSID Case No. ARB/98/5)

[14] Eureko B.V. v. Republic of Poland, (IIC 98)

[15] Spyridon Roussalis v. Romania, (ICSID Case No. ARB/06/1)

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