Authors: Javier Sauma / Mariela Sanabria (Colbs Legal Studio – Costa Rica)


The issue of compensation for lawful nationalization is one steeped in controversy and varying paradigms. Moreover, the cultural considerations behind the concept of property shifts from nation to nation, causing competing arguments that have further prevented the establishment of a homogenous regulation method on an international level. Therefore, an effective understanding of the current state of the subject of compensation for lawful nationalization requires the analysis of the existent regulation methods and key international Awards.

Historically, the controversy behind compensation for lawful nationalization surfaces from asymmetrical compensation policies and approaches. Predominantly, the discussion has been led by two main hypotheses, to be explained. The first of these hypotheses, following the Fifth Amendment to the Constitution of the United States, and as famously articulated by Secretary of State Cordell Hull, calls for “prompt, adequate, and effective” compensation 1. This compensation policy was followed by other capital-exporting states including France, Switzerland, and Germany, causing the standard of prompt, adequate, and effective compensation to be present in several international and general economic and commerce treaties2. On an opposing perspective, the Calvo doctrine has been popularly used to enforce the idea that foreign investors and aliens are to be subject to the laws and jurisdiction of the state in which they reside, even in cases of harm or disadvantage resulting from economic, political, or social distress3. Therefore, the Calvo doctrine has been an important influence internationally, as evidenced through the UN General Assembly Resolution 3281, which declares that compensation for the nationalization of the foreign property may be governed by the laws and courts of the state adopting said measures, unless these states have mutually agreed otherwise, based on the “sovereign equality of states in accordance to the principle of free choice”4.

As a result, the argument for compensation for nationalization has not only been torn through the different perspectives and cultural considerations behind the concept of property, but it has been further affected by the opposing opinions regarding the applicable norm to said compensation, whether it be international soft law or treaties, or the national laws and courts of the host state to foreign investment.

The vast differences and technicalities between national laws and jurisprudence cause the compensation methods between different states to vary considerably. Therefore, to better understand the issue of compensation for nationalization on an international level, comprehending the general legal framework provides for an adequate approach.

Beginning with the Energy Charter Treaty (ECT), which has been at the center of multiple million-dollar awards and the famous Yukos case, the ECT demonstrates an espousal of the Hull formula in Article 13(1). Said article calls for compensation that amounts to the fair market value of the investment nationalized or expropriated, and, at the request of the foreign investor, to be expressed in a Freely Convertible Currency on the basis of the market rate of exchange. Finally, Article 13(1) establishes that compensation shall also include interest at a commercial rate established on a market basis from the date of expropriation or nationalization until the date of payment5. As a result, the risk of nationalization or expropriation without compensation or inadequate compensation is severely reduced for signatories of the ECT, granting a sense of investment protection6.

Bilateral Investment Treaties (BIT), which are designed to promote trade and protect investments of foreign investors, often represent an acceptance of international law standards and customary international law, as well as dispute settlement mechanisms7. Therefore, BITs tend to include a prohibition on the expropriation and nationalization of investments, granting the protection against these measures as an incentive for investments. However, if such expropriation and nationalization should arise, BITs tend to approach compensation through the Hull formula likewise, usually requiring payment to be made in a freely transferable and usable currency, and maybe expressed through terms such as “market value” or “genuine value”8. As a result, regardless of the national laws for compensation, the BITs would provide the mutual agreement for other compensation methods as required by the UN General Assembly Resolution 3281 stated above.

Finally, Free Trade Agreements (FTA) tend to overlap with BITs when it comes to compensation schemes, as FTAs, investment chapters, and BITs are key elements in the effort to encourage free trade, requiring concrete investment law standards for the benefit of foreign investors. Although it is very difficult to generalize the contents of FTAs, FTAs tend to focus on the protection of investments, especially through standards such as the prohibition of expropriation or nationalization, most-favored nation treatment, international minimum standards of treatment and fair and equitable treatment 9. For example, the North American Free Trade Agreement (NAFTA) establishes in Article 1110 that compensation shall be equivalent to “fair market value” and shall not reflect any change in value if the expropriation had become known earlier, as well as establishing the obligation that compensation shall be paid without delay and be fully realizable10, once again adopting the Hull standard11.

Additionally, the aforementioned compensation schemes may also be understood by looking into the framework established by key Awards on the subject matter. A historic and still relevant case is the Factory at Chorzow (Germany v. Poland) of 1928, which makes the distinction between compensation under lawful and unlawful nationalizations. Essentially, the Court established the principle that the compensation for lawful and unlawful nationalizations vary, as in the case of unlawful nationalizations, compensation “is not necessarily limited to the value of the undertaking at the moment of dispossession”, as unlawful nationalization compensation must as far as possible, eliminate the consequences of the unlawful act and re-establish the situation which would have existed had that act not been committed12. Meaning that compensation for lawful nationalization, instead, is limited to the value of the nationalized object at the moment of dispossession and the applicable interests.

Regarding the role of sovereignty and national or international law, an Award of importance has been the Texaco Overseas Petroleum Company and California Asiatic Oil Company v. The Government of the Libyan Arab Republic, Award of 19 January 1977, with René-Jean Dupuy as the sole arbitrator. Through decrees in 1973 and 1974, Libya had nationalized all interests of Texaco and California Asiatic Oil Company13. The arbitrator established that states have an unquestionable right to nationalize as an act of sovereignty. However, that act of sovereignty may constitute a disregard of international commitments assumed and agreed upon as a result of the same sovereignty, which allows the state to enter internationalized contracts. Furthermore, the award established that by entering an internationalized contract, the contracting states place themselves under international law14. Therefore, although states do have a right to nationalize, said right is not sufficient ground to empower a state to disregard its international commitments towards other states and investment charters.

Latin America has also been a hub for a myriad of expropriation and nationalization cases, in which compensation has been considered as a central aspect of the disputes. Famously, within the Occidental v. Ecuador ICSID Case No. ARB/06/11, of October 2012, Ecuador alleged that Occidental breached the Participation Contract and the domestic Hydrocarbons Law by engaging in a separate agreement without previous authorization, consequently terminating the contract through decree. Occidental argued that Ecuador’s actions denied proper compensation, fair and equitable treatment, and were disproportionate. Relevantly, the lack of proportionality and termination from Ecuador was considered a violation of the United States – Ecuador BIT, Ecuadorian law, and customary international law. The Award cemented the overriding principle of proportionality in compensation, which “requires that any such administrative goal must be balanced against the Claimants’ own interests and against the true nature and effect of the conduct being censured”15, which is an important principle to keep in mind when applying the Hull principle of adequate compensation. As a result, a majority of the Tribunal awarded Occidental approximately US$1.7 billion in damages, the highest amount of damages ever awarded in an investment treaty arbitration16. In response, Ecuador requested the annulment of the Award in its entirety, or at least, partially. The Committee dismissed the petition for the total annulment of the Award and instead proceeded to lower the amount awarded for damages to US$1,061,775,000, with the remainder of the Award unaffected17.

International case law proves that the observable controversies behind the subject of compensation for lawful nationalization are strongly related to the lack of homogeneous regulation methods, including appraisal and assessment mechanisms. Moreover, bilateral and multilateral agreements (such as BITs and FTAs) tend to vary in the approach of this pivotal question in the field of global investments, which is often the main subject matter in large disputes. The arrangements between contracting states also diverge on this matter, as a result of different standpoints in the host state on the concept of property itself. Therefore, the lack of an express agreement in terms of applicable laws and valuation standards can result in contradictions and unregulated aspects, especially when expecting specific compensation schemes.

  1. Francioni, F. (1975). Compensation for Nationalisation of Foreign Property: The Borderland between Law and Equity. The International and Comparative Law Quarterly, 24(2), 255-283. Retrieved June 30, 2020, from
  2. See supra, 2.
  3. Horacio Alberto Grigera Naon, ‘Chapter 19: Arbitration and Latin America: Progress and Setbacks’, in Julian David Mathew Lew and Loukas A. Mistelis (eds), Arbitration Insights: Twenty Years of the Annual Lecture of the School of International Arbitration, Sponsored by Freshfields Bruckhaus Deringer, International Arbitration Law Library, Volume 16 (© Kluwer Law International; Kluwer Law International 2007) pp. 393 – 454
  4. See supra, 3. UN General Assembly Resolution 3281 (XXIX), 12 December 1974 (Charter of Economic Rights and Duties of States), Chapter II, Article 2, para. 2(c)
  5. Energy Charter Treaty, Article 13 (1).
  6. Muthucumaraswamy Sornarajah, ‘Chapter 17. Compensation for Nationalization: The Provision in the Energy Charter’, in Thomas W. Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade, (© Kluwer Law International; Kluwer Law International 1996) pp. 386 – 408
  7. ‘Chapter 2 ‐ Investment Protection’, in Christian Leathley, International Dispute Resolution In Latin America: An Institutional Overview, (© Kluwer Law International; Kluwer Law International 2007) pp. 13 – 54
  8. See supra, 7.
  9. See supra, 7.
  10. North American Free Trade Agreement, Part Five, Chapter Eleven, Section A, Article 1110.
  11. ‘Article 1110 – Expropriations and Compensation’, in Meg Kinnear, Andrea Kay Bjorklund, et al., Investment Disputes under NAFTA: An Annotated Guide to NAFTA Chapter 11, Supplement No. 1 (© Kluwer Law International; Kluwer Law International 2006) pp. 1110-1 – 1110-63
  12. Factory At Chorzów, Germany v Poland, Judgment, Claim for Indemnity, Merits, Judgment No 13, (1928) PCIJ, 13th September 1928, League of Nations (historical) [LoN]; Permanent Court of International Justice.
  13. ‘Chapter 11: Reparations Recoverable by Foreign Investors in International Law’, in W Michael Reisman, James Richard Crawford, et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 965 – 1084.
  14. Texaco Overseas Petroleum Company v. The Government of the Libyan Arab Republic, AD HOC AWARD OF JANUARY 19, 1977.
  15. Occidental Petroleum Corporation, Occidental Exploration and Production Company v. The Republic of Ecuador, Award, ICSID Case No. ARB/06/11, 5 October 2012
  16. Dietmar Prager, ‘Occidental Petroleum Corporation, Occidental Exploration and Production Company v. The Republic of Ecuador, Award, ICSID Case No. ARB/06/11, 5 October 2012’, A contribution by the ITA Board of Reporters, Kluwer Law International
  17. Occidental Petroleum Corporation, Occidental Exploration and Production Company v. The Republic of Ecuador, Decision on Annulment of the Award, ICSID Case No. ARB/06/11, October 2015