Expropriation for Foreign Investors

This article explores the evolution of expropriation for foreign investors and the legality of different types of expropriation. It discusses the compensation process and the types of expropriation, including direct and indirect expropriation. The article also examines the issue of creeping expropriation and the guidelines for compensation in expropriation cases.

Running Head: Expropriation for Foreign Investors 1
Expropriation for Foreign Investors
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Expropriation for Foreign Investors 2
Preface
The right of a state to expropriate property within the country at will is considered to be
fundamental since it is meant to help the masses. However, expropriation has raised numerous
questions, disagreements, and debates on its rightness. Debate has largely focused on a country’s
desire to determine its economic progress, and therefore, justification of the fact that
expropriation should be undertaken in absence of full compensation ((UNCTAD, 2000, pp. 5–7;
Dugan et al., 2008, p. 435). This argument has in some instances led to outright expropriation
being undertaken by states, while on the other hand, investors have increasingly raised up in
arms against such. As time progressed, the idea revolving around indirect expropriation started to
be implemented rapidly by states, although this is never used to be a recognized method of
implementing takings. Implementation of a new trend in nationalization was basically motivated
by the following factors: First, the rights of investors to hold onto property are currently well
covered by very many International Investment Agreements that have continuously been
implemented in different country’s over the years. Hence, this has made it is quite possible for
this group of stakeholders to contest for property that is to be expropriated. Secondly,
governments have been found to have a great influence on the direction that is taken by
economies of most countries. Such actions have led to greater negative effects being felt
especially within the private sector. This paper is going to explore the evolution that has occurred
of the years with regards to the issue of expropriation. The discussion will also evaluate deeply
how compensation is undertaken after expropriation. The legality of different types of
expropriation will equally be reviewed.

Expropriation for Foreign Investors 3
Brief background of expropriation
National governments have the sovereign power to repossess property that is owned by
aliens through expropriation or nationalization. The repossession of property is undertaken with
the aim of achieving objectives that are in line with the country’s societal, economic, or
economic targets. However, if this process is not well checked, governments may end up taking
advantage of loopholes that exist in expropriation. Therefore, international legality is imposed in
the process of expropriating so as to ensure that the following conditions can be attained. First,
the expropriated property should solely be used for public gains. In this case, the property should
instead be used to satisfy the needs of many unlike it was before expropriation. Secondly,
expropriation should be undertaken on non-discriminatory grounds (Pils, 2016). Thirdly, legal
statutes that have been established to guide the process should be followed to the latter. Any
government ought to respect the international legislations that have been implemented to guide
the expropriation. Expropriation should equally be associated with compensation of an equal or
even greater amount.
The advent of the global economic crisis led to an evolution being taken up by most of
the economic regulatory bodies. This change helped to bring light to the important role that is
played by nations in the process of formulating policies that are geared towards satisfaction of
public desires. Governments have in very many instances been involved in resuscitation of
failing sectors of the economy. Efforts have even been made to acquire shares in certain
companies in order to help inject more finance and sustain the companies further ((TNCs).
(UNCTAD, 2010, pp.79–81).). Since this is considered to be an appropriate approach in any
economy, it is then argued that states should then be responsible for implementing measures that
help to manage environmental, societal, public health safety, and welfare. UNCATAD has
undertaken research into the implementation of indirect and direct expropriation. Based on the
research, it was evident that there are certain forms of expropriation that don’t really require a
government’s international responsibility to be triggered (Yu-yang, 2012).
This situation existed only in cases where various steps are followed by a state in the
process of expropriating. The report also explored the justifiable reasons that may warrant a state

Expropriation for Foreign Investors 4
to regulate a specific sector of the economy without necessarily resulting in expropriation.
However, in absence of compensatory requirements loss of valuable investments within country
would be encountered. Over the years, the idea behind regulatory takeovers and indirect
expropriation has largely been revolutionized as research into the issue has led to better
definitions being adopted. Likewise, better precision has been adopted by IIAs in implementing
how measures that don’t necessarily lead to indirect expropriation are defined, how exceptions
are designed for the sake of securing the interests of governments in trying to regulate public
interest, and finally how valuation methods for measures for compensation implemented
(CHENG et al., 2009).
Types of Expropriation, Critical Elements and Requirements for Lawfulness
Through efforts that have been implemented by IIAs, governments have ended up being
forced to provide guarantees to foreign and local investors on the security of their property. This
is achieved by offering assurances that expropriation shall not be undertaken in absence of full
compensation. Thanks to such measures, nearly all Bilateral Investment Treaties (BIT’s) have
some kind of expropriation memorandum of agreement. More importantly, Customary
International Statutes have implemented guidelines for directing expropriation approaches on
foreign owned properties. These guidelines are continuously used in conjunction with the already
adopted International Investment Agreements in instances where a clear definition of
expropriation has not been adequately covered by the latter. Inconsistency has been found to
exist largely on the definition that has been adopted by IIA’s (Yang, 2012). For instance, terms
such as dispossession, expropriation, deprivation, nationalization, or takings have overly been
used. While these terms can be applied interchangeably, their exploitation largely relies on legal
translations and trade traditions in a specific state (Schwartz, 2013).

Expropriation for Foreign Investors 5
Direct Expropriation
This form of appropriation refers to mandatory takeover of an asset and is legally covered
by the laws in a country. In this case, the title of the property is also fully transferred. Direct
appropriation occurs in situations where the states intends to benefit itself. This may also occur
where the property needs to be transferred to a state related third party. Where direct
expropriation occurs, there exists unequivocal intent that is outlined the existing statutes of a
country. In this case, deprivation of the right to ownership of a certain property that is of interest
to the states should be considered to be lawful (Yomralioglu, Uzun, & Nisanci, 2008). The
occurrence of extensive expropriation measures being undertaken by states occurs very rarely in
today’s global economy. However, very few countries in Latin American have been found to
resort to such adverse measures. Direct expropriation can also be achieved by states through the
acquisition of large amounts of capital from the economy, but this occurs most only in
emergency cases. For instance, when there is a global financial crisis and the state needs to
revive a certain sector of the economy that has been badly affected (WANG, et al., 2008). This
was for instance undertaken by most countries in the wake of the 2008-2009 international crisis.
Indirect expropriation
This is quite similar to direct expropriation since there is full deprivation from ownership
of an investment. The only difference is that the related title is not handed over to parties taking
over ownership. This aspect of takeover was already occurring even before Bilateral Investment
Treaties started being implemented. In many cases all over the world, rights to ownership of
property had massively been hampered. In early court proceedings, it had become evident that
various measures that can be undertaken by the state would simply be interpreted as mounting to
indirect expropriation (Chorzów Factory v Norwegian Shipowners). In the Iran and United States
BIT, it was argued that indirect expropriation existed and was also permitted by international
statutes. Over the years, International Investment Agreements continuously referred to the
existence of indirect expropriation (Kantor, 2009). This continued to happen as much as very few
statutes made an effort to recognize the role that is played by indirect expropriation and its
consequences. In the BIT between Malaysia and Lebanon, it was established that none of the

Expropriation for Foreign Investors 6
contracting parties is allowed to adopt measures that may result in nationalization of property
invested upon by the other provided certain conditions are absent. Likewise, in the BIT
established between Croatia and Australia (1997), it was outlined that expropriation could be
undertaken on investments of either party in the contract (du Plessis, 2009). However, strict
guidelines were provided since nationalization could only occur when the objective was meant to
satisfy public interests. Most importantly, full legal measures should have have been
implemented and adequately followed. Therefore, as much as IIA’s that have been established in
the recent years do not specifically point out to what is meant by indirect nationalization. The
idea behind expropriation tends to be very extensive, and cannot encompass the necessary
measures that are needed to successfully implement indirect and direct takings. However, a
number of IIA’s that have been established in the recent years have been found to indicate what
is meant by indirect or direct expropriation by employing terms such as “tantamount to” or
“equivalent to.”
Creeping Expropriation
The definition to this form of expropriation has not been fully standardized and there
exist various derivatives of the term. These include; disguised, de-facto, constructive, disguised,
creeping or virtual expropriation. However, irrespective of the term that is applied, creeping
expropriation is basically a form of indirect expropriation. Creeping expropriation will normally
result in total loss of rights to property. However, the taking is implemented in parts until finally
a party doesn’t have the mandate of control over an asset (Marboe, 2015). The actions that result
from creeping expropriation can also be defined as incrementally occurring on rights of foreign
investors to a point where the value that is associated with a property is totally lost. Various State
Statutes are then implemented over a specific time period after which they end up being
considered as independent sections of the originally unified investment or investor. Based on a
governments arbitral award, practice, or doctrine, creeping nationalization is commonly
associated with the following attributes; Actions under indirect expropriation can directly be
related to a state (Scarrett, 2008). There is also extensive disruption on rights to ownership of
property and legal interests that were initially protected. The disruption occurs to a point where

Expropriation for Foreign Investors 7
relevant rights associated with an asset are totally relinquished as much as legal entitlement on
the investment may be upheld.
Issue of compensation in Expropriation,
The major issues revolving around nationalization tend to focus on determination of the
specific standard that can be attached to the compensation process. Issues have also come up
with regards to the most suitable approach that can be adopted during valuation since this has
extensive an impact on the technique and quantum remuneration (Yirsaw Alemu, 2013).
Numerous scholars have tried to analyze compensation schemes that have been adopted to
satisfy the interests of investors whose property has been expropriated. In the midst of all this
controversy, guidelines in Customary International Statutes that define how payment should be
undertaken appear to be well consolidated (Grover, 2016).
The BIT between the United States and Iran has overly been used to provide guidance on
the issue of compensation. The tribunal’s decisions that were made in the Iran-United States
Treaty of Amity, Economic and Consular Rights 1995 of 1995 has largely helped to shape and
define decisions that are made during evaluation of payment relating to expropriation. (8 U.S.T
899,248,U.N.T.S.93). The tribunal involved in resolving the stalemate between Iran and the
United states adopted a Standard of Remuneration that had already been incorporated in the
Treaty of Amity. By doing so, the tribunal managed to sideline the evolutionary approach that
allowed the old rules to be transformed so that “appropriate compensation” could be taken
(Kantor, 2008).
Compensation for Nationalization (a) Problems relating to legal and illegal expropriation
International statutes outline that investments properties of aliens should and cannot be
taken over by local governments in absence of adequate compensation from the latter. The
International legislations outline that each state is obligated to ensure that foreign investors are
able to get value for investments which have been taken up by the states. Based on the

Expropriation for Foreign Investors 8
conclusions drawn up in the litigation, the Mixed Claims Commission proposed that numerous
questions revolve around the rights possessed by a state in being able to expropriate assets
invested by foreign investors. However, as much as this is the case, the state is obligate to ensure
that the foreign investor is justly compensated (Wälde, & Sabahi, 2008). The tribunal involved in
the Phillips Petroleum Company case ascertained that based on international statutes, the
expropriation of assets by or to a state translate into a liability where compensation becomes
mandatory regardless of whether the nationalization was de facto or formal.
Bowett defined three recognized modes of compensation that can be adopted at any
instance by an aggrieved foreign investor. They include; compensation relating to an unlawful
expropriation, compensation relating to an adhoc or lawful expropriation, and compensation
relating to a generalized nationalization act. The tribunal in Phillip’s Petroleum Company made
it very clear that it is necessary for states to a draw a clear line of distinction between unlawful
and lawful expropriation (Maury & Liljeblom, 2009). Reference was made to the Chorzow
Factory Litigation where the Amoco Tribunal also emphasized on the importance of
differentiating between the two instances. This is because the guidelines that define how
compensations should be undertaken tend to vary between the expropriators depending on how a
taking has been undertaken (27 ILM, 1314 (1988), p192).
However, the main question that remains unanswered is the value of compensation that
should be attached to the unlawful compensation. Should it be same as that of a lawful
compensation? The debate surrounding compensation related to legal and illegal nationalization
is critical since implementing a standard method of compensation would go against the interests
of various investors. This would be common where nationalization is normally undertaken using
underhand measures. Compensation involves reparation that occurs in relation to illegal
expropriation. The Chorzow Factory litigation involved an illegal taking of assets belonging a
German Company by the Polish government (Hui, et al 2013). The PCIJ argued that it is
generally expected, on the basis of conceptual and international legal stipulations that
engagements, which have been breached should be equally reparated. The court in this case
distinguished between what may amount to illegal or legal expropriation.

Expropriation for Foreign Investors 9
The court also ascertained that the primary principle, which is apparently adopted by all
international statutes, and most importantly by the decisions of other tribunals, is based on the
fact that reparation is outrightly necessary. The act should as much as possible eliminate
consequences resulting from unlawful nationalization, by making efforts to revert the investors
situation back to normalcy. Normalcy, in this case, is defined as the situation that would have
existed were it not for the unlawful expropriation by the state. When expropriation is undertaken
by a state in a lawful manner, restitution will not be enforced in most of the cases. However, it is
up to the nationalizing state to ensure that it pays pecuniary remuneration that amounts to actual
value of asset that was nationalized (Bernasconi-Osterwalder, Cosbey, & Johnson, 2000).
In a huge number of expropriation cases, the primary issue that faced the tribunal
revolved around whether the application of general standards made a reference to conclusions
that were drawn in the International Customary Statutes, or to the 1955 United States-Iran Treaty
of Amity, Economic Relations and Consular Rights. The treaty proposes in Article 4 s2 that:
investments that are owned by companies or nationals from high contracting parties, while
incorporating interest held in the investments, should be associated with the highest degree of
security and protection (Porterfield, 2011). This should be done when investments have equally
been set up in territories of high contracting parties. Most importantly, this should be undertaken
on BIT’s that have adequately incorporated international statutes. Expropriation of such
properties should only be undertaken only in instances where the taking is for the benefit of the
public majority, and should be associated with an equally matching compensation amount.
Compensation relating to such will be done in a manner that is adequately realizable, and should
in effect reflect on the full value of the property that has been acquired. Finally, a sufficient
determination should have been undertaken before or during the time of expropriation for the
purpose of understanding the full value of the payment (Konowalczuk & Ramian 2010).
In the litigation between Iran v American International Group (,( 84 ILR 645 (1991),654-
656)) it was concluded by the tribunal that based on the International Customary Statutes, it was
necessary that the full compensation be undertaken. Additionally, there was no need of referring
to the Treaty of Amity on how conclusion from the litigation could be applied to this particular
case. Iran Government argued that the Treaty of Amity was obsolete, and even in the case that it
could be applicable, expropriating the insurance industry in Iran would translate into actual

Expropriation for Foreign Investors 10
nationalization as defined in the treaty (Joffé, et al 2009). The standards and statutes defined in
the treaty couldn’t be applied to this case. According to the tribunal, the America-Iran
expropriation shouldn’t be considered to be illegal. However, compensation was actually
awarded based on general principles where the tribunal argued that compensation should be
provided regardless of the nature of the expropriation. The tribunal involved in litigating the
Sealand’s Services Case considered adopting a mixed approach when defining the Treaty of
Amity.
The tribunal argued that apart from the conclusions that have previously been developed
in elaboration of the treaty, the tribunal could only make an observation and conclusion on the
basis of the case at hand. Articles 2 and 4 of the treaty fail to elaborate further the scope of the
Nation’s International liability beyond the Acts that have been defined by international statutes
on expropriation (Escarcena, 2014). The idea behind an expropriation is actually similar to what
has been defined by international statutes in the Treaty of Amity. As much as the treaty might
end up influencing the amount of compensation that might have to be payed, the claimant
doesn’t end up being relieved from the task of ensuring that a breach of international obligation
has been sufficiently reported. Likewise, based on conclusion drawn up in Sealand’s tribunal
view of expropriation, considerations could not be made on the fact that compensation could be
acquired through relying on definitions that have been provided by the Treaty of amity (6 Iran-
U.S.C.T.R. (1984),p 149).
Methods of compensation in expropriation
Issues arising out the need to provide compensation by host countries to international
investors has created room for very divergent points of views. The difference in ideology revolve
around whether international investment statutes enforce an obligation on expropriating states to
ensure that affected parties are paid up accordingly. The major exporting countries in the globe
have supported the existence of the such obligations for host states, while communist and
recently independent nations that depend heavily on imports counter the proposal for
compensation obligations especially where legal channels for instituting expropriation have been
followed to the latter (Schnaidt & Sebastian, 2012). The objection towards the obligation is

Expropriation for Foreign Investors 11
based on the fact that host nations are trying to equalize profit margins between foreign and local
investors, attain national treatment, and eliminate inequalities that primarily developed from
colonial engagements. Therefore, disagreement largely touch on issues revolving around the
most suitable standards that could be used to assess the value of expropriated investments, and
how compensations could equally be carried out. A combination of international customary
statutes and Investment protection Treaties demand that host nations should pay up sufficiently,
and that expropriation processes should follow a set of laws in order to cover the interests of
foreign investors (Sargeson, 2013).
Different Approaches and Modalities to Compensation
A major question that arises in regards to compensation relates to the scope. Should
aggrieved investors be payed fully or only appropriately such that the value of payment. This
question should be answer before tribunals go ahead to determine the total value of the
investment that has been expropriated. Numerous BIT’s employ the standard of “effective,
prompt, and adequate” compensation. The standard is known as the Hull Formula and was
established by the us in 1972. The formula defines that the investor should be compensated, once
an investment has been made, an amount that matches the expropriated asset in an exchangeable
currency and should be freely transferable. Hull formula is taken to imply full compensation by
various BIT’s. In this case, compensation should be made in a manner that it matches the actual
amount of asset invested and the profits lost in the process. The BIT’s that adopt this approach
tend to avoid differentiating between unlawful and lawful expropriation (Sluysmans, Verbist, &
de Graaff, 2014).
BIT’s demand that compensation should be based on the appropriate market value of the
expropriated investment. In the North American Free Trade Agreement NAFTA Section 1110.2,
compensation for expropriation should be equal to appropriate market value. However, there
have been arguments that “appropriate compensation” and Hull Formula translate into the same
thing and some BIT’s have tried to assimilate these two terms. However, Tribunals have
generally argued that Full compensation should always be expected regardless of the terms that
is used to define the compensation approach.

Expropriation for Foreign Investors 12
Full compensation in relation to the actual market value is not the only recognized
standard of reimbursement. In the period between 1950’s and 1970’s, appropriate compensation
was the most commonly used approach, and even today it is protected by the United Nations
General Assembly. Most importantly, it may reflect on various guidelines of the International
Customary statutes. This approach may be taken to imply “less the complete amount” of the
expropriated investment, and is applied by tribunals where it is considered to be fair. This
approach only favors a state. It is usually championed for by the states since it is seen to provide
a platform where public and private interests can be balanced as identified by the “just”
reparation of Chile-Tunisia Tribunal (1998), and the “Equitable and Fair” India-United Kingdom
BIT (1994). The Charter of Fundamental Rights of the European Union (2000) champions for
“fair compensation” in instances where lawful expropriation has occurred. Assets should also be
related in a reasonable manner to the actual value.
The All-or-Nothing approach commonly occurs where the tribunal chooses to offer zero
compensation or full compensation. This technique has been overly coitized as it makes it
impossible for states to balance its interests and those of the public. Investors always prefer Full
Compensation when they present their grievances. However, the European Court of Human
Rights adopts a flexible approach when it chooses not to award full compensation. This occurs
where expropriation affects a large number of investors, when large reforms in the economy are
being undertaken, and when the expropriation influences social justice interests (Kriebaum,
2007b, p. 740). Full compensation cannot be awarded under such instances as it will negatively
affect the interests of the public and the state financial capabilities. This has occurred many times
when the state is undertaking widespread nationalization in an effort to reform the economy and
satisfy societal interests. In such an instance, investors have to contend with “appropriate
compensation”.
Compensation is taken to be prompt when it is provided without delay. It will be
adequate when the current market value has been incorporated during the evaluation process, and
it will be considered effective when it is paid in a manner that it can be easily converted, or using
the investor’s freely usable currency. This create bring the discussion to the modalities that are
adopted by states when providing compensation. Apart from ensuring payment is made
promptly, the other question revolves around how the process of compensation is achieved.

Expropriation for Foreign Investors 13
There are three main approaches of paying compensation that can be achieved by the State (He,
& Asami, 2014). Freely Transferable and Fully Realizable, and Non-peculiarly Settlement. The
first approach involves providing payment using hard currency and assets that can be converted
into a different currency. The second approach involves payment through cash. And the final
technique involves the state investing in activities that are of public interest such as resettling
displaced population (Rathkolb, 2019).
Methods of Evaluating and Calculating Damages related to Expropriation
Quantum damage resulting from expropriation can be calculated though the Liquidation
Value approach, replacement value, or the book value. The income approach employs
Discounted Cash Flows, the market value uses offerings, comparable sales techniques, stock
prices, and prior transactions. Other approaches use the invested amount. There are also hybrid
techniques that are rarely used. The suitability of the approach being used depends on the
presented facts by the investor. However, the two majorly used techniques are Market Approach
and Discounted Cash Flows (DCF). Their use the frequency of facts being repeated in a case
where investment law applies.
DCF is the most common methods used to measure the damages resulting from
expropriation due to its customizability and ability to allow manager to make prior planning.
However, its applicability comes with caution as outlined by the World bank as investors have
ben seen to exaggerate claims. This method is commonly suitable where indeterminate or
speculative damage is being calculated. It is also suitable for determining profits that cannot
accrue legitimately if the host country statutes are considered.
Discount Rate Premium
In this approach, risk is calculated based on a discounted rate premium relating to an
investment or a particular country. The value of risk is measured and added to equity cost and

Expropriation for Foreign Investors 14
debts accrued to each country that has ever traded in the host nation. Variation only exists when
determining the risk level in a country. The equation appears in this format:
Equity cost= Country risk premium+ Risk-Free-Rate+ Mature Market Premium.
Probabilistic Adjustment
The second approach that can be applied under DCF is the Probabilistic Adjustment.
Under this case, probable scenarios are evaluated. i.e, the possibility that a risk may occur. The
consequences of a cash flow are then measured by relating to all possible scenarios. Assumptions
may then be made that the host nation adheres to all foreign investment protection guidelines,
illegally expropriations, or lawful expropriation by ensuring that the time factor is not violated
(Lindsay, 2012).
Market Approach
This approach values a company by making comparison to other enterprises that have
posted their price details. The type information that will commonly be considered for the
evaluation process include interests of business owners, resemblance between businesses, types
of securities that are exchanged, and any transactions on shares that resemble those of the
expropriated enterprise. Prior transactions and offers provided for different components of the
business will also be considered. Employing Multiples and prior transactions have been found to
be the most common approaches used. Tribunals mostly prefer to use previous transaction data
and focus is placed on prior interference of enterprises that are being valued (Zhang, & Lu,
2011). The quantum value may need to be adjusted based on the time that has elapsed, industry,
alterations in the economy, and the enterprise. Challenges relating to this approach are fewer that
in DCF since it is only the lack of information that can make it challenging to make appropriate
adjustments.
Methods of Valuation for Compensation in Expropriation for Foreign Investments

Expropriation for Foreign Investors 15
Various treaties make reference to methods of evaluating the expropriated amount quite
differently. For example, NAFTA (1992) argues that the approach to be used in evaluation
should incorporate the net asset value, which includes the tangible property’s tax value that has
been declared, the ongoing concern value, and any other suitable technique that may be used to
ascertain the actual value of the expropriated amount. This valuation approach has been taken up
by the Canada-Peru BIT (2006), Korea-Mexico BIT (2000) and numerous other treaties. On the
other hand, other International Investment Agreements demand that the investment values should
be pegged on the generally established standards relating to valuations (e.g. the China-Côte
d’Ivoire BIT (2002). The Switzerland-Oman BIT makes reference to the general standards that
are normally used in valuation. However, it also proposes that these should be supplemented
with other approaches that are quite different from those defined by NAFTA (Mahalingam &
Vyas, 2011).
It states that the compensation amount should be carried out in accordance to the current
market value based on the determination by standard valuation principles like; inter alia,
replacement value, invested capital, goodwill, appreciation, and any other suitable factors that
can be applicable in the valuation process. Based on the above formulations, essential
information that can be used to guide tribunals in selecting an evaluation and compensation
method have been outlined. However, the final approach towards the valuation is left to be
decided by the arbitrators. Other treaties go as far as to include the need of equitable principles in
the valuation process (Desierto, 2012). As much the aforementioned treaties fail to specify the
most suitable method of valuation that can be applied to all cases, it is evident that remuneration
relating to future profits is entirely ruled out. This also implies that using Discounted Cash Flow
(DCF) approach is equally not applicable. Therefore, the amount that is generally evaluated for
compensation is normally lower unlike what would have been gained if DCF is incorporated
(Simmons, 2013).
The Market Value Method

Expropriation for Foreign Investors 16
This method of valuation entails determination of the value that can be attached to an
investment based on legislations that have been stablished in the market. Based on the CMS v
Argentina tribunal, this is the price that can be accepted when a product is being exchanged
between a willing buyer and seller who are dealing in unrestricted market conditions. Reference
is made to a transaction to determine the price at which the hypothetical market participants may
be willing to engage in a transaction. Most importantly, it is essential that the reference date of
the hypothesized transaction can be determined as markets tend to change based on the volatility
that exists in the stock markets (Beuselinck & Deloof, 2014).
The Net Book Value Method
This is the currently determinable value of an asset that is outlined as a gross value after
subtracting the depreciation amount. This method is commonly used to determine the static value
of an asset at a specific date. In this approach, only the past value is determined, and any
expectations from future earnings are not considered. This approach is normally adopted by the
tribunal in instances no profitability that was reported in past dates, where the operation never
kicked off simply due to bottlenecks being brought forth by the host nation, or existence of a
deficit balance of trade. In most cases, tribunals tend to shy away from compensating unrealized
profits (Nikièma, 2013). This approach is only taken by tribunals that rely on international
customary statutes with the view that compensation should be done for damnum emergens, and
in the case where lawful expropriation was undertaken.
The Net Present Value of Discounted Future Cash Flow Method
This method calculates the actual value of an asset by weighing the actual cash flow of an
investment. Using this method, the future cash flow is estimated, and a discounted rate is applied
as this points out to the capital cost and associated risk relating to future revenue flow that is only
estimated and meant to find the actual value. The method is associated with complexity since it
anticipates for the potential fluctuations of the investment value over a varying period of time so
as to come up with an average value.

Expropriation for Foreign Investors 17
Strengths and Weakness of the Methods of Evaluating and Calculating Compensation for
Expropriation in Foreign Investment
The Market Value Method
Strengths
The advantage of this approach is the fact that it is associated with an attractive principle which
is a good thing for investors since they will end up getting an amount that is almost similar to
what they had invested in a country. More importantly, the approach is viewed as one that truly
reimburses investors with the full amount of what they had invested, and therefore, it translates
to full compensation. This approach does not only take the business as the only investment, is not
static and has the potential to provide income. Disruption of an economic activity makes the
investor lose not only his/her assets when the expropriation has occurred, but it also makes it
impossible for the investor to continuously capitalize on the investment and gain income at the
present and in the future (Corey, 2012).
Weaknesses
The technique is associated with huge levels of manipulation and speculation on the risk.
This is because assumptions are primarily based on the anticipated profits. Secondly, the method
doesn’t take into account what will be done in the absence of a national competitive market
where the investor was a monopoly.
The Net Book Value Method
Strengths
The approach is preferred due to its objectivity and use of historical earnings. Most
importantly, it eliminates the possibility of manipulation since it never takes into account future
aspects of the business.
Weaknesses

Expropriation for Foreign Investors 18
Analysts consider the method to lack an aspect of dynamicity when evaluating
investments. i.e it fails to look at the ability of an enterprise to generate profit. Hence it is very
possible for the method to cause under compensation such that the actual value of the
investments fails to be accounted for. This approach remains applicable in very few instances.
The Net Present Value of Discounted Future Cash Flow Method
Strengths
Despite the extensive criticism imposed on this method of valuation and compensation,
the method is considered to be highly objective, cautious, and realistic unlike the market value
approach since it combines various factors. Most importantly, the method ensures that future
risks have been accounted for by weighing the compensation amount (Źróbek, S., & Źróbek,
2008).
Weaknesses
This approach is quite complex as it anticipates for changes in market value of an
investment either over a long or short time. The process of determining the factors that can be
used to deter mine how discounting will be undertaken may easily miscalculated. In most cases
where efforts have been made to apply this technique, it has led to wide variation int eh values
that are obtained.
Conclusion
Method of evaluation for damages and compensation
Expropriation is very dynamic matter such that it is quite difficult to adopt a standard
way of addressing compensation claims. Every matter needs a unique approach to be taken, and
even so, there tends to be one party that will feel unfairly treated. During expropriation, it is
obvious that the investor might lose a lot, but after a decision has been made by a tribunal, the
government in question may end up paying a lot for compensation especially where
nationalization was undertaken unlawfully. The process of nationalization cannot be prevented

Expropriation for Foreign Investors 19
from occurring now and in future (Yirsaw, 2012). Therefore, the main question that remains is
how analysis of damages and analysis of compensation will be undertaken as this will always
remain to be the most important aspect for the investor in any nationalization case. The market
approach of determining damages is more dynamic and less complicated (Luo, & Jackson,
2012). Even where the tribunal may find it difficult to re-adjust value due to lack of shared
aspects between enterprises that are being compared, valuation multiples may be used as an
alternative. Therefore, the market approach provides more than just a single approach to the
problem of evaluating damages. Discounted Cash Flows suffers major challenges such as
adopting a common theme and having the tendency of over evaluating risks. This may be
considered to be good for investors, but may lead the approach to hurt the interest of the public
especially where nationalization has to be undertaken in order to satisfying the interests of the
public.
When evaluating the value of compensations, the Net Present Value of Discounted Future Cash
Flow Method would be more preferable due to its ability to explore the future possibilities and at
the same time take care of the present by subtracting the discount rate. As much as it may be
complex, this method is preferable since it helps investors to gain compensation that is almost
equal to the actual value of their investment. It is evidently quite impossible to find a solve-it-all
formula for all cases. However, it could be possible to offer sufficient guidance to tribunals that
will be involved in evaluating the compensation amount based on how the BIT will be drafted.

Expropriation for Foreign Investors 20
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BIT’s

Expropriation for Foreign Investors 23
Iran and United States (2001)
Malaysia and Lebanon (1998)
Croatia and Australia (1996)
North American Free Trade Agreement NAFTA (1992)
Canada-Peru BIT (2006)
Korea-Mexico BIT (2000)
China-Côte d’Ivoire BIT (2002)
Switzerland-Oman BIT