Creeping expropriation of investment by foreign state
08 May 2018
In the first known English court ruling to set aside an investment treaty arbitration award, the court ruled that an investor seeking redress for allegedly wrongful acts by a foreign State, which it claims constitute a creeping expropriation, can rely on the full series of events and measures to make good its claim, even where one of the impugned acts (a decision by a court of the foreign State) may itself be a direct expropriation. The article considers the implications of this ruling for foreign investors, and includes a reminder on the meaning of direct, indirect and creeping expropriation: GPF GP S.À.R.L. v The Republic of Poland  EWHC 409 (Comm), 2 March 2018
A Polish investment and alleged expropriation
In 2008, GPF GP S.a.r.l (Griffin), a Luxembourg-incorporated company, invested, through a series of subsidiaries and financial transactions, in a property in Warsaw, Poland, which was to be redeveloped. It had acquired the rights to the property under a Perpetual Usufruct Agreement (PUA), a form of quasi-ownership under Polish law. Certain approvals were sought and received from the Polish authorities for the redevelopment plans but, during the course of 2009 and 2010, these decisions were reversed and, among other things, demolition work was ordered stopped by the Warsaw Monument Conservator (the Prior Measures).
In 2014, the Warsaw Court of Appeal upheld a judgment of the lower courts terminating the PUA for failure to develop the land and, at the same time, a mortgage over the property securing certain loans made by Griffin was cancelled.
It is Griffin’s case that, at this time, its investments lost their entire value. It commenced an investment treaty arbitration against the Republic of Poland under the investment treaty between Belgium, Luxembourg and Poland (the BIT).
In the arbitration, Griffin alleged that: (i) Poland had breached the BIT’s fair and equitable treatment (FET) standard; and (ii) the Prior Measures, combined with the Warsaw Court of Appeal’s judgment, constituted a series of acts attributable to Poland which amounted to an indirect expropriation in the form of a creeping expropriation: the Prior Measures prevented construction work taking place and the Warsaw Court of Appeal had terminated the real property rights under the PUA due to the delays in construction.
In a jurisdictional award rendered in the arbitration, the tribunal ruled that, under the terms of the BIT, it had no jurisdiction over Griffin’s claim for a breach of the FET standard. More pertinently for present purposes, the tribunal also held that a claim for “creeping expropriation” could not be made where the final act in the series of events said to amount to the creeping expropriation (the Warsaw Court of Appeal decision) could amount to an expropriation itself. As such, the tribunal determined that, in considering Griffin’s claim for indirect expropriation, it was limited to assessing the effect of the judgment of the Warsaw Court of Appeal and whether it had effects similar to an expropriation. It held that it did not have jurisdiction to consider the Prior Measures. Griffin challenged various aspects of the award before the English High Court, as the court of the seat of arbitration, under s67 (Challenging the award: substantive jurisdiction) of the Arbitration Act 1996.
This article focuses on the expropriation aspects of the case, in which context the English court held that the tribunal was wrong to decline jurisdiction over Griffin’s creeping expropriation claim. It should be noted, however, that the English court also ruled that the tribunal wrongly declined jurisdiction over Griffin’s FET claim. This aspect of the case, however, turned on a careful linguistic analysis of the relevant article in the BIT and is not discussed further here.
Expropriation, a refresher: direct, indirect and creeping
Investment protection treaties rarely attempt to define expropriation beyond generic references, since a great variety of state acts and measures may amount to a de facto taking of a foreign investment. Direct expropriation involves the seizure – whether legally or factually – of an investor’s investment and occurs where, for example, a State seizes by force an investor’s property or compulsorily transfers ownership rights away from the investor. Direct expropriations are now increasingly rare, however. By contrast, in instances of indirect expropriation, the investment remains formally the property of the investor but it is deprived of the enjoyment and economic value of the investment. The application of a 95% tax on profits generated by an investment, for example, might be found to constitute an indirect expropriation since the effect of that is tantamount to depriving the investor of the economic value of its property. Creeping expropriation is a form of indirect expropriation and refers to the situation where there may be no single act of expropriation but rather a series of acts that, over time, have an equivalent effect.
Claim for creeping expropriation not prevented because final act in chain also an expropriation
The judge held that it is perfectly possible as a matter of both law and logic:
for a direct expropriation to be preceded by an indirect expropriation – the former involves the formal taking of title, while the latter does not;
for there to be a creeping expropriation, ie an indirect expropriation by virtue of a series of measures viewed in aggregate, where the final act in that chain of events also amounts to an indirect expropriation in its own right; and
to have a creeping expropriation where the act at the end of the chain of events is a specific act of direct expropriation.
In the second and third cases, the fact that the final act in a series of events may amount to an expropriation – whether direct or indirect – does not render all prior events irrelevant and a claim for creeping expropriation is not precluded in such circumstances. The tribunal’s ruling to the contrary in Griffin’s case does not represent international law, which recognises state responsibility for a creeping expropriation in the concept of a composite act.
The doctrine of creeping expropriation aims to assist an investor whose asset has (allegedly) been expropriated. If it were correct that a creeping expropriation claim was precluded if any act in the chain constitutes an expropriation, this might well leave an investor worse off, depending on the nature of that act. If, as here, that specific act happens to be a court decision, the investor would have to establish a denial of justice on the basis of that single decision, rather than taking account of the aggregate effect of the earlier measures.
The tribunal was directed to continue its proceedings on the basis that it had jurisdiction to consider Griffin’s FET and creeping expropriation claims.
This important judgment – the first known instance of an English court setting aside an investment treaty award – ensures that an investor seeking redress for allegedly wrongful acts by a foreign State can rely on the full series of events which it says amount to a creeping expropriation. The tribunal’s ruling potentially prejudiced investors, limiting the claims they could make, and the facts on which they could rely, where a series of events culminates in a single specific act, that could amount to an expropriation. It should also cause tribunals to exercise more caution in pre-judging at the jurisdictional phases, matters better considered in full at the merits stage of a case.
This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. If you wish to receive this publication, please contact Amy Edwards, firstname.lastname@example.org.