U.S. property in jeopardy: Latin American expropriations of U.S. corporations' property abroad.

• Author: Monagas, Yessika

1. INTRODUCTION II. THE FIRST WAVE OF EXPROPRIATIONS A. Direct Expropriations B. Indirect Expropriations (or "Creeping Expropriations") III. ELEMENTSOFEXPROPRIATIONS A. Justification B. Compensation IV. THEORIES BEHIND NATIONALIZATION V. THE NEW WAVE A. Constitutional Protections B. Issues with Jurisdiction VI. POSSIBLE SOLUTIONS FORTHE CURRENT TIMES A. Insurance Policies B. Treaties and the Use of Treaties Against the Calvo Doctrine C. Contract Clauses D. NAFTA's Expropriation Clause VII. IN A PERFECT WORLD VIII. CONCLUSION Those who cannot remember the past are condemned to repeat it. (1)

1. INTRODUCTION

   An expropriation or nationalization is the forced, non-negotiated purchase or uncompensated seizure of property by a public authority from a private owner (2) during times of peace to "place [such property] at the disposal of its public services, or of the public generally." (3) Such seizures swiftly eliminate any profit expectations held by the investment owner, even if adequately compensated. (4)

   During the 1940s to 70s, multinational corporations saw a surge of nationalizations and expropriations in the Latin American region. (5) With the quick evolution of technology and increased expectations on the standard of living, third world countries embarked in a mass expropriation of property within the oil industry. (6) Mexico, for example, is now the infamous first mass expropriator in the energy industry. (7) After the 1970s, Latin American countries largely ceased expropriations and nationalizations. (8) However, with the new surge of socialistic regimes and anti-"Imperialistic Yankee" (9) feelings in Venezuela, Ecuador, and Bolivia, the trend of expropriations in South America is back in full swing. (10)

   This article explores the history of expropriations in Latin America in times of peace during the early to mid-twentieth century and their effects on international investment. It analyzes the applicable treaties and other international agreements, the procedures multinationals must follow when seeking redress, and the problems a corporation may encounter when going through international judicial systems. It also explores the new trend of expropriations, including the new methods and policy reasons applied by the expropriating countries. Most importantly, this article gives greater emphasis to the legal reasoning and policies behind Latin American expropriations and their legitimacy, rather than merely focusing on whether there was proper compensation awarded to the injured parties.

2. THE FIRST WAVE OF EXPROPRIATIONS

   Expropriations have been around since Roman times. (11) However, in the past, the act of expropriation constituted willingly and voluntarily surrendering one's property for religious purposes. (12) Now this word implies having property taken away, and in the international arena it may well actually mean "stolen." (13) This section explains the most basic form of expropriation and the new, much more sophisticated, methods used by governments to take property belonging to a foreign investor, none of which were the modalities of expropriation employed by the Romans. (14)

   1. Direct Expropriations

      A direct expropriation is the taking of property by a host state from a private investor, (15) which could arise by presidential or legislative mandate. Although the Mexican expropriations of the 70's were "direct," the circumstances that allowed the Mexican government to seize these oil concessions were in the making for many years. (16) This was most strongly evidenced in the development of new law in Mexico in 1925 that divided oil fields into "free land and non-free land." (17) Only land designated as "free" was available for concessions. (18) Not surprisingly, by 1935, ninety percent of oil fields were on non-free land. (19)

      The next step came in 1936 when Mexico's law of expropriation on the basis of public utility was enacted and approved by then Mexican President Cardenas. (20) Public utility was defined under the law as "the defense, conservation, development or utilization of natural resources, susceptible to exploitation." (21) Furthermore, payment for expropriation was to be "based on the tax value of the property" and effectuated within ten years after the expropriation. (22) Without this political chain of events the Mexican mass expropriations of 1938 (23) might have never happened, and perhaps the history of foreign investments in South America could have been a very different one.

      Similar to Mexico's re-nationalization, Venezuela enacted the Reserving Law in 1975, which allowed the country to "assume full control of its valuable hydrocarbon resources." (24) The effects of the 1975 Reserving Law were that (1) "all outstanding concession contracts were terminated," (2) "the state was granted a monopoly of oil and gas operations," (3) "the formation of the National Oil Company was required," now called Petroleos de Venezuela or PDVSA for short, (4) "the National Oil Company would own and manage all assets reverted to the state upon the termination of the existing concessions," and (5) "the state obtained exclusive control of all oil and gas exports," among others. (25)

      The 1975 law also required compensation based on the asset's book value; however, this law contradicted a pre-existing rule that required only fair compensation. (26) A contradiction is in Article 113 of the Venezuelan constitution, or Venezuela's equivalent to the United State's antitrust law, which "includes a provision allowing concessions to exploit state-owned resources." (27) Ironically, this provision was included for the very purpose of avoiding the expropriating and nationalizing frenzy that has been implemented in the last few years. (28)

      As previously mentioned, the historic approach to expropriation has been focused on whether there was just compensation, regardless of the legitimacy of the expropriation itself. (29) In the Mexican expropriations of 1938 and the Venezuelan expropriations of 1975, the outcomes of the settlements are still not entirely clear to the public. (30)

   2. Indirect Expropriations (or "Creeping Expropriations") (31)

      As the name indicates, indirect expropriation means that the investor has no option but to leave the property behind and abandon the project due to the country's policies and actions, such as increased taxation and other unfair policies. (32) During the 1970's there were also occasional "indirect" expropriations executed in Mexico. (33) The events that led to these indirect expropriations began in 1938, when Mexico's oil production had significantly declined, causing investment to drop as output decreased even further. (34) The decrease in revenues along with pressure from Mexican labor union's demands for higher wages hit the oil companies' interests hard. (35) To make matters even more difficult for investors, the Mexican Supreme Court granted the unions a wage increase, and when the companies responded that they could not abide by the order, the government cancelled all oil contracts and nationalized the oil business. (36)

      Comparably, Argentina undertook a policy change in the mid-twentieth century to reclaim its control over its energy resources, mainly gas. Argentina's method of expropriation diverges from conventional nationalization procedures. (37) Instead of merely cancelling energy contracts, Argentina sought to reclaim its power over its natural resources by steadily increasing tariffs against the gas companies and transporters. (38) The increase in taxes progressively sliced the companies' profits, squeezing them out of the international market as they became noncompetitive. (39)

      Taxations can also prove to be a challenge when the host country provides no guarantee that applicable taxes will remain somewhat stable or within a range. (40) Commonly, foreign investors cannot use legal provisions to minimize the risk that taxes will change to their disadvantage. (41) Often, they have no expectations of a stable tax system, other than a subjective trust in that country's government. (42) The problem then becomes how much of a tax increase is too much of a tax increase so that the international community may consider it an expropriation? The court in EnCana Corporation v. Republic of Ecuador held that "only if a tax law is extraordinary, punitive in amount or arbitrary in its incidence would issues of indirect expropriation be raised." (43) Furthermore, if the company is producing profitably, the possibility of succeeding in a claim of deceitful expropriation is even lower. (44)

      Some examples of Argentina's creeping expropriations can be seen in the cases LG&E v. Argentine Republic, in which the claims of expropriation were a result of "regulatory changes in the tariffs for gas distribution and transport" within the Argentine territory. (45) As commonly seen during the times of crisis, in the 1980s Argentina's government policies reflected a desperate attempt to restore the country's economy by opening the doors to foreign investors by offering opportunities of privatization and government concessions. (46) One of the government's big projects was the privatization of the state's national gas company, Gas del Estado S.E., which was the sole provider of gas in Argentina. (47) Furthermore, in 1991 the Argentine government enacted the Convertibility Law, which established a fixed exchange rate that would peg the Argentine currency to the value of the dollar. (48) Part of the plan to restore international confidence in the Argentine market also included the ratification of several international agreements such as the International Centre for Settlement of Investment Disputes (ICSID) and bilateral treaties, including a U.S.-Argentina bilateral treaty. (49) Encouraged by these changes in policy, "LG&E purchased a 45.9% interest in Centro Gas, a 14.4% interest in Cuyana Gas, and a 19.6% interest in GasBan," all of which were previously nationalized gas companies. (50)...