One of the most controversial provisions in trade and investment agreements is the following provision, taken from CAFTA: "Article 10.7.1: No Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”)..." CAFTA goes on to say:
3. Article 10.7.1 addresses two situations. The first is direct expropriation, where an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.
4. The second situation addressed by Article 10.7.1 is indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.
(ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and
(iii) the character of the government action...
Virtually every NAFTA investor-state case has claimed that certain policies were "tantamount to" an expropriation (the language was changed to "equivalent to" in the post-NAFTA period). We did a report that touched on some of these issues back in 2005. As we wrote then:
These provisions not only expose governments to liability that they often would not have under domestic law with domestic investors, but can also chill policy initiatives. As we said in our report:
A March 16, 2002, article in the Toronto Globe and Mail surprised Canadian health officials who were preparing to issue a new regulation on cigarette labeling. The newspaper reported that Philip Morris, the U.S. tobacco giant, was considering a Chapter 11 investor-state suit under NAFTA because of a proposed public health rule that would ban the words “light” and “mild” from cigarette packaging, terms that have misled smokers into believing that they were using a safer product.
In a submission to the Canadian government, Philip Morris argued that the proposed ban of the descriptors “light” and “mild” would be “tantamount to an expropriation” of its tobacco trademarks containing those words in violation of NAFTA Article 1110, because it had invested millions “developing brand identity and consumer loyalty.”...
While Philip Morris has told Public Citizen that it is not moving forward with the threatened NAFTA case, the Canadian public health legislation is not moving forward either. A spokesperson for Physicians for a Smoke Free Canada thinks that the Philip Morris threat as well as threatened domestic court action has played a role in stalling passage of this important public health policy.
In the recent Glamis case, a NAFTA tribunal ruled against a claim that U.S. and California mining policy was "tantamount to" an indirect expropriation, because basically the company's bottom-line wasn't found to be hurt enough (besides the fact that the corporation still had the dang mining rights). A related concern was that Glamis hated a ton of small government actions, which taken on their own were not significantly costly impediments to their mining operation, but which the company argued taken together represented a sort of conspiracy that could be considered tantamount to an indirect expropriation. The tribunal disagreed, and didn't think it was correct to look at all the actions as a unified whole in any case.
In the recently launched case by Railroad Development Corporation (a U.S. company) against Guatemala, the company is claiming that a series of government measures was "equivalent to" an expropriation, even though no formal expropriation occurred. While neither side acted particularly angelically in this case, the ability of corporations to launch cases for indirect expropriation is of significant public-interest concern.
(Say the Berger administration had acted less shadily, and instead issued a lesivo declaration to get out of a contract with a multinational firm that was sitting on a railroad without developing it. Say we were in the middle of a global recession, and that railroad was a way to directly and indirectly employ loads of unemployed folk. Under CAFTA, that multinational could launch a case against the government for "a measure equivalent to an indirect expropriation."... Now, as I understand the history of lesividad, it would be declared when the public purse was damaged in a particular way... one wishes we had the tool here to deal with Citi and AIG!)
Going back to the actual RDC case and away from the hypothetical, the company could apply the Glamis standard and claim that it has suffered major setbacks after the lesivo declaration that almost completely destroyed the value of their Guatemalan investment. However, as the company noted, the final court approval of the declaration never occurred, and the damage to their investment came mostly from the negative public relations fallout of the public thinking than an actual expropriation would be imminent. Whether a tribunal would fault the government for all the subsequent fallout is an interesting question, and one we'll continue to watch.