WHAT PRICE EXPROPRIATION?

COMPENSATION FOR EXPROPRIATIO : THE CASE LAW

Controversy continues to rage over whether the "Hull formula,"

requiring the payment of "prompt, adequate and effective" compensation
for the otherwise lawful taking of aliens' property by the state, represents
or has ever represented the customary international law standard. Draft
section 7 I 2 of the American Law Institute's Restatement of the Foreign
Relations law of tht United States (Revised)1 simply states the standard as
"just compensation." Comment e does, it is true, assert that the United
States has consistently championed the Hull formula; but all in all, the
text accompanying draft section 712 is somewhat guarded as to the
position in general international law. In the .January 1984 issue of this
journal, Davis R. Robinson, Legal Adviser of the State Department,
criticized the draftsmen's hesitancy about what he called the "traditional
standard. "2 Battle was immediately joined by Professor Oscar Schachter
who, in the same issue, questioned whether the so-called traditional
standard is or ever was a rule of customary law.?
For various reasons, it would be inappropriate for me here to enter
into a comprehensive examination of the current position in customary
law, let alone embark on a discussion of the possible merits or demerits of
various standards of compensation as a matter of lex [erenda. Nor do I
wish to comment on the present form of the draft Restatement. However,
I would like to question what seems to me to be a potentially misleading
account by Professor Schachter of a particular aspect of the matterD
namely, the standard laid down by the decisions of international courts
and tribunals" with regard to the sufficiency of compensation.
According to the former joint editor in chief: "It is true that several
'traditional' decisions of international tribunals recognize an international
obligation to pay compensation when alien property is taken by a stale.
However, contrary to what is often asserted, these decisions contain no
1985] ACORA: WHAT PRICE EXPROPRIATION? 415

reference to the 'prompt, adequate and effective' standard."! This statement

may be true in a literal sense; but, when it is made in the context of a
broader thesis that 'just compensation" is a flexible standard which does
not necessarily require payment in full,6 the natural implication is that the
cases support, or at least do not contradict, his thesis. If this is what
Professor Schachter means to suggest, it is respectfully submitted that he
is mistaken; if it is not what he means, the ambiguity is very unfortunate.
Whilst the cases do not espouse the Hull formula in so many words, they
do require the payment of full compensation and provide no support for
a flexible standard in this regard.
PREWAR GAS.ES
Professor Schachter tells us that "probably the most frequently cited
opinion in this field," the Chorulw Factory case in the Permanent Court of
International justice," "refers only to a duty to [sic] 'payment of fair
compensation.' "8 This is an inaccurate account of the Court's celebrated
obiter dicta. The actual decision in the case turned upon a finding by the
Court that Poland was in breach of its obligations to Germany under the
Geneva Convemion concerning Upper Silesia of May 15, 1922. In the
case of an unlawful expropriation, the Court found, 1.he primary duty was
one of restitution in kind, "or, if this is not possible, payment of a sum
corresponding to the value which a restitution in kind would bear [together
with] the award, if need be, of damages for loss sustained which would
not be covered by restitution in kind or payment in place of it. "9 The
Court. contrasted this with the obligation that Poland would have been
under had this been a normal expropriation "to render which lawful only
the payment of fair compensation would have been wanung."!" But this
is not the only dictum on the point, for on the very next page the Court
spoke of the obligation, in cases of lawful expropriation, to pay "the just
price of what was expropriated" and "the value of the undertaking at the
moment of dispossession, plus interest to the day of payment." "The just
price of what was expropriated" and "the value of the undertaking" are
phrases rather more consistent with full compensation than with a more
flexible standard, especially bearing in mind the legal, political and
economic assumptions of members of the Court, and of the legal systems
they represented, in I 928. Moreover, it seems quite clear from the
{udgrnent as a whole," the separate opinions and the pleadings, that the
416 THE AMERICAN JOURNAL OF INTERNATIONAL LAW (Vol. 79

Court considered that the minimum pecuniary obligation in all cases was
the payment of the full value of the property taken; what distinguished
unlawful from lawful takings was the odduumal obligation in the former
case. if restitutioin integrum was impossible, to compensate for consequential
loss. What the Court said and assumed about the standard of compensation
for lawful takings may, strictly speaking. be obiter, but it has traditionally
been regarded as the locus classicus on the subject and, for better or for
worse, it supports a "full compensation" standard.
The only other case Professor Schachter refers to by name in this
context is the Norwegian Shipowners' Claims arbitration of 1922.12 Now, it
is true that the Permanent Court of Arbitration in that case (Valloton,
President; Anderson, Vogt) described the applicable standard as "just
compensation "-a phrase which Professor Schachter himself favors; but
what is significant for our purposes is that it was common ground between
Norway and the United States that the appropriate standard was "just
compensation" in the sense in. which that phrase is used in United States
constitutional law, and the tribunal so awarded." In the Fifth Amendment
to the United States Constitution, as interpreted by the Supreme Court,
"just compensation" means the full amount of a fair valuation based on
the price a willing buyer would pay to a willing seller.14 The arbitral
tribunal decided that the "fair market value" of the claimants' property
should be paid, and treated "just," "full" and "fair" as virtually interD
changeable notions SO far as the standard of compensation was concerned."
Whether or not the award supports the "prompt and effective" formulaD
which Professor Schachter questions but which is outside the scope of the
present paper to discuss-it certainly does not support the view that "fair"
compensation can be less than full.'"
These are the only cases referred to by name in the relevant part of
the Editorial Comment, but the author goes on to say that "[i ]f we look
for 'traditional' law in the earlier cases, such as those collected by Ralston
in his classic work, 11 we cannot find a single decision expressing the
'prompt, adequate and effective compensation formula. "18 Once again,
whilst it may be literally true that (so far as I am aware) none of the cases
adopts the actual words of the Hull formula, there are in fan several
decisions of international arbitral tribunals, both before and after the
Chorulw case, that require the payment of full compensation in cases of
1985) AGORA: WHAT PRICE EXPROPRIATION? 417

otherwise lawful expropriation. '9 Naturally, the tribunals were more

concerned with the facts before them than with laying down broad
principles applicable 10 a wide range of hypothetical circumstances, but
this is normal practice and certainly does not warrant the inference that
the general standard was regarded as flexible.t" The consistency of the
case law is not unimpressive," as a chronological survey will dernonstrate.P
The compensation provisions of Article 297 oft.he Treaty of Versailles
were extended by the Treaty of Berlin of 1921 to the United States.
Under Article 297, Germany was to pay "compensation" for damage to
the "property, rights and interests" of Allied nationals caused by "excepD
tional war measures" or forced transfers. In Administrative Decision
No.
111,2' the U.S.-Germany Mixed Claims Commission assumed for the
purposes of its opinion that the property in question was taken in
conformity with the laws of war but held, nevertheless, that Germany was
obliged "to make full, adequate, and complete compensation or reparation
for all losses sustained by American nationals" falling within the terms of
the Treaty of Berlin, the value of the property to be assessed as "the
reasonable market value of the property as of the time and place of taking
. . . if it had such market value; if not, then the intrinsic value of the
property as of such time and place.':" And in the Goldenberg case, the sole
arbitrator (Fazy), applying the same provision of the Treaty of Versailles,
held that even in the case of lawful requisition, the property had to be
"equitablernent payes le plus rapidement possible," and that the payment
of one-sixth of the market value of the property as of the date of taking
amounted to a wrongful confiscation of the other five-sixths.P
In the Spanish Zones of Morocco case, the sole arbitrator, Max Huber,
held that "ii peut erre considere comme acquis qu'en droit international
un etranger ne peut ctre prive de sa proprieie sans juste indemnite'?"
418 TH AMERICAN JOURNAL OF INTERNATIONAL LAW (Vol. 79

and, in applying this standard, employed the value of the property as of

the date of taking, plus interest. 21
In the De Sabia case, the United States-Panama General Claims ComD
mission held that "[i]t is axiomatic that acts of a government in depriving
an alien of his property without compensation impose international reD
sponsibility," and went on to hold that the claimant was entitled Lo the
.. full value" of property which had been adjudicated to third
parties.28
Enough has perhaps been said to show that the "traditional" standard
laid down by the prewar cases did require the payment of "full" compenD
sation, even in the case of lawful takings. More recent arbitral decisions
suggest that, even now, there is still life in the old standard.f?

POSTWAR CASF.S

The LIAMCO arbitration'" is generally regarded as the most "radical"

of the trio of cases arising out of the Libyan decrees of the 1970s taking
over foreign-owned oil concessions." The sole arbitrator (Mahmassani)
preferred not to treat the Government's action as an unlawful taking. but
nonetheless recognized that international law requires the payment of
compensation even in the case of a lawful nationalization. On the question
whether there could be recovery for lucru.m us.sans-broadly, loss of
profits-he regarded international law as unsettled, and preferred to
employ the notion of "equitable compensation. "'2 Nevertheless, "affirmD
ing the undisputed legal obligation of the nationalizing State to pay full
compensation for all the loss sustained (da.mllum emergms)," he awarded
the claimants the market value of their physical plant and property as of
the date of taking, as well as "equitable compensation" (including an
element for loss of profits) for the termination of one of their concessions."
In the Ai\lfJNOIL arbitration," a distinguished arbitral tribunal (Reuter,
President; Sultan, Fitzmaurice) held that it was not in the particular
circumstances unlawful to nationalize the concession and related physical
assets in question; nevertheless-and in accordance with principles
which,
1985} ACORA: WHAT PRICE EXPROPRIATION? 419

in the tribunal's view, the expropriating state had itself recognized-it

held that the company was entitled to the depreciated replacement value
of its fixed assets, together with compensation for loss of future profits.
Finally. there is the decision of Chamber Three of the Iran-United
States Claims Tribunal in American International Group, Inc. and American
Life Insurance Co. v. Islamic Republic of Iran and Central Insurance of Iran. '~
The claim arose out of the nationalization of the Iran America International
Insurance Co. in 1979. The claimants relied upon both customary law
and the Treaty of Amity, Economic Relations, and Consular Rights
between the United States and Iran of August 15, 1955. The respondents
disputed the continuing validity of the Treaty and also its applicability to
the case. In the event, the Tribunal concluded that it did 1101 have to
decide this question, in effect holding that, in a case of lawful nationalization,
the standard of compensation was the same under customary law as under
the Treaty. So far as customary law was concerned, the respondents
further argued that "the traditionally asserted standard of 'prompt,
adequate and effective' compensation ... has been repudiated by modern
developments in international law; instead, a standard of 'partial compenD
sation' should be applied, based on references contained in resolutions of
United Nations organs and from post-war settlement practice." They
further contended that "even if the standard of compensation were held
to be -ust' compensation for 'full value', it would be inappropriate and
unreasonable to value the propeny as a going concern"; instead, they
suggested a "net book value" approach" The Tribunal rejected these
submissions and held that the claimants were entitled to "the fair market
value of the shares in Iran America at the date of nationalization"; it
valued the company "as a going concern, taking into account not only the
net book value of its assets but also such elements as good will and likely
future profitability.""

CONCl.USIONS

Interesting and important questions can be asked about the morality

and expediency of different compensation standards. And even if we
confine our discussion to the lex lata, it is not suggested that the present
review is conclusive. Case law is far from being the only. or the most
important, source of international law. An adequate account of the current
general law on the subject would entail a comprehensive review of the
420 TNE AMERICAN JOURNAL or INTERNATIONAL LAW [Vol. 79

state practice-including an assessment of the extent (if any) 10 which

various General Assembly resolutions and patterns of treaty making in the
postwar period may have affected a "traditional" standard. The writings
of publicists and the possible relevance of general principles of law would
also have 10 be taken into consideration. All these matters are beyond the
scope of this paper. However, as Professor Schachter himself implicitly
recognized, a correct interpretation of the case law is an important element
in determining whether a "traditional" standard of full compensation for
otherwise lawful state takings ever existed. My analysis suggesls that,
according to the case law at least, it did exist; and I would respectfully
suggest that Professor Schachter's account is in this respect erroneous
or-due to its ambiguities-misleading.
M. H. MENDELSON*
 COMPENSATION CASES-LEADING
AND MISLEADING
Mr. Mendelson, like other lawyers accustomed to accepting the Hull
formula of 1938 as traditional doctrine, is troubled by my comment on
the cases often cited in support of that formula. Yet Mr. Mendelson
concedes the truth of my observation that these cases (which affirm an
obligation to compensate) contain no reference to the "prompt, adequate
and effective" standard. Nor do the later cases adopt that standard. I see
no reason why it is misleading or ambiguous to state this "literal" truth.
On the contrary, it seems to me misleading to cite those decisions as if
they approved the Hu II formula.
The main point of Mr. Mendelson's criticism is that the cases require
payment of "full" compensation and do not support a "flexible" standard.
He suggests that "[w]hilst the cases do not espouse the Hull formula in so
many words," they support the substance of that formula. However, his
reasons for this conclusion do not stand up to analysis.
To begin with, Mr. Mendelson chooses to omit the "prompt" and
"effective" components of the Hull standard. Since they have been treated
as essential elements of the formula, one would suppose it important to
determine whether they are required. Mr. Mendelson considers the main
point of the Hull formula to be an absolute requirement of "full"
compensation (he prefers "full" to "adequate") and he argues that several
cases support that requirement. But the cases he cites only show that the
tribunals applied the criterion of fair market value (or its equivalent) and
sometimes included an amount based on future earning prospects (the
lucrum cessans). Not surprisingly, the tribunals considered their determi-
nation as providing "just" or "fair" compensation in the particular case.

Fellow in Law. Si.John's College. Oxford. Ahhough I am counsel for vosper p.l.c. in a
case arising out or the oationaliutK>n of the British aircraft and ship-buildjng lndustrles
in
1977, now pending in the European Court of Human Rights, the views expressed here arc
personal and responsibility for them is mine
alone.