Compensation For Expropriated Property Essay

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When a multinational firm (“parent company”) engages in foreign direct investment, defined here as financially investing in facilities or physical assets— usually through a foreign subsidiary—with the expressed purpose of exploring for, manufacturing, or marketing a product in a foreign country, it does so with the understanding that its property rights are legally recognized by the host country government. It is generally agreed that host country governments may unilaterally engage in nationalization of specific privately owned or public/privately owned industries, whereby industry assets revert to public ownership. The process of nationalization, accomplished with compensation to the parent company, is called expropriation. If nationalization is undertaken by the host government without market-value compensation to the parent company, it is considered a case of confiscation, a recognized political risk associated with foreign direct investment decisions made by multinational executives.

However, there has evolved a general consensus among nations (Resolution 1803 on Permanent Sovereignty over Natural Resources by the United Nations General Assembly in 1962) that for a lawful nationalization of industries, it should be accompanied by “appropriate” compensation for private property. This United Nations Recommendation essentially upheld the “Hull Doctrine,” generally supported by economically-developed countries, recognizing that under international law compensation should be “prompt, effective and adequate”—although a somewhat weaker term, “appropriate compensation,” was substituted for “full value” of the expropriated property.

This United Nations Recommendation substantially rejected the “Calvo Doctrine,” supported by many less economically developed countries, which left the question of compensation entirely with the host government, or the view of communist nations, whose ideology did not recognize “private property,” thus the right of compensation. From the perspective of how the compensation should be measured, there remain two controversial and interrelated steps. The first step entails agreement on the market value of the expropriated property to ascertain the actual economic loss sustained by the shareholders (or private owners) of the multinational corporation. The second step involves a legal determination of the extent to which the shareholders (or private owners) are entitled to compensation for their economic loss.

One important and widely employed international mechanism for protecting a parent company’s foreign direct investment is through the use of a bilateral investment treaty. This trade pact establishes the specific terms and conditions for private investment by corporations, or nationals, of one nation-state in the nation-state of the other treaty signatory. One typical feature addressed in bilateral investment treaties is protection from expropriation or confiscation by the host country. If an expropriation does take place, and insufficient compensation (“less than fair market value”) is offered by the expropriating government, the bilateral investment treaty typically allows for the expropriated party to seek arbitration recourse through an alternative dispute resolution mechanism. In lieu of attempting to sue the host country in its domestic courts, or seeking legal recourse in home country courts (a difficult undertaking due to the “Sovereign Immunity Principle”), the leading organization employed to arbitrate such compensation disputes between home and host countries is the International Centre for the Resolution of Investment Disputes (ICSID).

The ICSID, established in 1966 under the World Bank–sponsored Convention on the Settlement of Investment Disputes between States and Nationals of Other States (also referred to as the “Washington Convention”), assists in alleviating noncommercial risks posing an impediment to the free flow of private investment among countries. The ICSID’s primary purpose is to provide conflicted parties (subject to their mutual consent) facilities for conciliation and arbitration of international investment disputes. Not surprisingly, the ICSID is often referenced in bilateral investment treaties and international law. As of November 2007, there are 155 nation-states that are signatories to the Washington Convention and are thus eligible to employ the services of the ICSID in matters concerning expropriated or confiscated private property.


  1. International Centre for Settlement of Investment Disputes, ICSID Convention, Regulations and Rules (ICSID/15, 2006);
  2. L. Knetsch and T. E. Borcherding, “Expropriation of Private Property and the Basis for Compensation,” University of Toronto Law Journal (v.29, 1979);
  3. Muchlinski, International Enterprises and the Law (Blackwell, 1995);
  4. L. Richards, Law for Global Business (Irwin, 1994).

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