In the James case (1986),356 the European Court of Human Rights (ECHR) pointed out that legitimate public interest objectives, such as economic reform measures or measures to achieve greater social justice, could justify interference with property, which proves a wide discretion left to the European states. In the arbitration judiciary, a view was expressed that legitimate expropriation or nationalization must serve public purpose, although sometimes this purpose is additionally qualified. In the Liamco case, referring to the claim that the measures were politically motivated and did not aim to achieve a legitimate public objective, the Tribunal found that there was a general opinion in international theory [sic!] that public utility is not a prerequisite for the legality of nationalization. What is more, the Tribunal stated that natural resources belong to the communities represented by the state rather than to the owner of the land.357 The Texaco ruling recognized the existence of a “public purpose” requirement, while acknowledging that there are difficulties in its assessment.358 Also the Amoco ruling indicates that such a requirement is easily met due to the “wide margin of appreciation” doctrine.359 This thesis is also confirmed in the literature on the subject.360
3.5.2.3 The right to refuse to pay compensation or to determine it freely
On the initiative of developing countries, Resolution No. 88 (XII) included a provision that the measures that states can take to regain their natural resources are the expression of the sovereign power under which every state is responsible for determining the amount of compensation and the procedure for taking such measures.361 Similarly, in Resolution No. 3171 (XXVIII) it was stated that the use of nationalization by states, as an expression of their sovereignty, means that each state has the right to determine the amount of possible compensation and mode of payment.362
There is no evidence in treaty law to support the thesis that the state has the right to withhold compensation or is free to determine the amount of compensation. On the contrary, some treaties provide for the duty to pay compensation and indicate the criteria for the amount of compensation. In many cases, however, acceptance for only “partial” compensation is observable in the natural resources sector, which results from the fact that “full” compensation when it comes to the financial resources and state development plans of the nationalizing state would actually undermine the effect of nationalization.363
Although the principle of quick, proper and effective compensation is popular with regard to bilateral investment agreements (BITs), there are few decisions of courts and international tribunals that would apply it directly in these matters. The Texaco, Aminoil and Ebrahimi364 rulings are examples of references to the “appropriate compensation” formula contained in Resolution No. 1803.365 In the case of INA Corporation v. Iran (1985), the Iran-United States Claims Tribunal noted that in the case of illegal nationalization on large scale, international law gradually approached an assesment that may result in undermining the doctrinal value of any “full” or “appropriate” compensation normally proposed in this case.366 In the view of the Tribunal, the contemporary soft principle of international law on compensation has found the most concrete expression and widespread acceptance in Resolution No. 1803 (XVII). Furthermore, the Tribunal considered that the expressions “appropriate”, “fair”, and “just” define practically interchangeable terms in relation to compensation, since even in the case of the best intentions they inevitably leave a margin of uncertainty and recognition.367
In the case of Ebrahimi v. Iran (1994), the Iran-United States Claims Tribunal stated that although international law undoubtedly determines the duty to compensate for seized property, the theory and practice of international law do not allow to state that “quick, appropriate and effective” compensation is the predominant standard. Rather, customary international law favours the standard of “appropriate” compensation. The gradual appearance of this principle seeks to ensure that the amount of compensation is determined in a flexible way, i.e. taking into account the particular circumstances of each case. The “proper” standard of compensation does not mean, however, that compensation should always be “less than full” or always “partial”. After correct estimation of the full value of the property, the compensation should be set to reflect the relevant facts and circumstances of each case.368
The ad hoc tribunal in the Aminoil case considered the issue of “legitimate expectations” that the investor would have, including the assessment of “excessive profits” in the past, remaining above the “reasonable rate of return” that should be deducted from the amount of compensation.369 The retroactive concept of excessive profits has already been used before, e.g. by the Chilean government during the nationalization of the Andean Mining Company,370 a copper mining enterprise, and by the Libyan government in reference to Bunker Hunt,371 but it met with opposition from the United States372 due to the specificity of oil companies, which – if deprived of excess profits from the business – will not be able to afford exploration and development of other deposits.
3.5.2.4 The right to freely choose the means of settling disputes concerning nationalization
In this regard, there may be two types of potential disputes: disputes between states and disputes between the host country and the foreign investor. Achieving agreement on arrangements for the second-type dispute resolution has always been more problematic. The Latin American countries have taken a particularly strong stance on this matter by making provisions in their constitutions and by applying the Calvo clauses in contracts securing that foreigners should be subject to the law of the host country and that they should bring investment disputes only to local courts. On the other hand, Western states have stressed the right of host countries to grant diplomatic protection and the right of foreign investors to adjudicate in cases where the fairness of local courts is questioned.373
Resolutions of the General Assembly No. 1803 (XVII)374 and 3171 (XXVIII)375 and Article 2 of the Charter of Economic Rights and Duties of States (CERDS) are important in this respect, although, as regards dispute resolution, they only concern the disputes on compensation. Resolution No. 1803 (XVII) indicates the need to exhaust local remedial actions before an applicant appeals to arbitration or international jurisdiction, unless otherwise agreed. Article 2 of the CERDS is consistent with the Calvo clause, and therefore only emphasizes the resolution of disputes by national courts, unless a free choice of other peaceful means has been made.
The requirement of prior exhaustion of local measures is strongly rooted in international law and is expressed in treaty law,376 international jurisprudence,377 and in doctrine. It amounts to the fact that the state against which a complaint has been brought for damages caused by non-state actors has the right to refute such action if that entity has not exhausted all remedies in accordance with the law of that state. This requirement results from the principle of state sovereignty and expresses respect for the territorial jurisdiction of states. Its justification is that the state must be able to remedy the situation in accordance with its own judicial or administrative procedures.378
In accordance with the ICSID Convention, a contracting state may require that all local administrative or judicial means are exhausted before agreeing to international arbitration. The Convention also provides that any contracting state shall provide diplomatic protection or bring an international claim in relation to a dispute which one of its investors and other contracting state agreed to surrender under the ICSID arbitration procedure.379
The Draft OECD Convention on the Protection of Foreign Property (1967)380 underlines the role of international arbitration in inter-state disputes. It also indicates that the parties’ investors may institute proceedings before an arbitration tribunal established under the Convention regarding: exhaustion of local or other (national or international) mandatory remedies; acceptance of the jurisdiction of the arbitration tribunal by the host country; and the waiving by the receiving State of