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International and Comparative Law Quarterly

(January 1977, volume 26, p. 97)







A HOPEFUL sign in the current atmosphere at the United Nations is the more realistic interest in reconciliation between countries on the opposite sides of capital transfers. It is opportune then to, consider how recognition might be won for multilateral standards for the settlement of investment disputes. The concept proposed here as likely to prove generally acceptable is that of equitable restitution, Equity is a concept that has an instinctive, universal appeal though it is admittedly a very elastic concept, as its application in taxation has amply demonstrated.

Before detailing the application of the concept of equity to compensation for nationalised property, attention is drawn to the problem from its economic and historical dimensions. Only a myopic view of history fails to acknowledge that such international standards of compensation as have existed have been constantly in a state of evolution or, to put it differently, that there is no immutable standard. The content of the standard reflects the current state of economic relations which are themselves constantly evolving.

Direct foreign investment is a solution to the problem of financing the risk and distributing the rewards of development. As extensive and important as it is, direct foreign investment is not the only solution to this problem. Its principal deficiency is that it does not incorporate a satisfactory distribution of control and accountability between private and public sectors. The result has been misunderstanding, abuse and distaste that have caused responsible persons to avoid many of the control and accountability problems associated with foreign direct investment. This is often accomplished by choosing an alternative to direct foreign investment as a solution to the risk-reward-accountability-control matrix.


Capital exporting countries maintain that there exists an international standard for compensation in nationalisation cases and that this standard is found in the decisions of international arbitral tribunals. But the interested standards applied by these tribunals have caused them to fall into disuse.

Capital importing countries now refuse to arbitrate before boards committed to the capital exporters' standards of compensation. Moreover capital importing countries seek to avoid the effect of existing treaties which commit them to such third party arbitration. Capital importing countries frankly admit that their prior submission to arbitration according to such standards has been motivated by their desperation for investment funds, other-worldly faith in the benevolence of the boards, or a cynical resolution in any event not to submit to the arbitration process.

The United States Foreign Settlement Claims Commission is directed by Congress to consider fair market value, book value, replacement cost and going-concern value in assessing compensation.1 The American domestic standard is "fair market value" decided in the light of such considerations as the cost of production less depreciation, market value based on the sales of comparable property and capitalisation of net income.2 Thus the American tribunal charged with responsibility for arbitrating foreign cases of nationalisation applies the same standards as would an American court seized of a dispute between two American parties. The supposed international standard guarantees the foreign investor non-discriminatory treatment, and prompt, adequate and effective compensation. This has meant that governments cannot nationalise the property of foreigners only, nor can they pay less compensation to them than to local nationalisation targets; the payment must equal at least the book value of the assets, and arguably their going-concern value; payment must be in a convertible. currency with no strings attached; and payment must be made within a reasonable time and include a competitive interest element for any delay.

That such a standard should be viewed favourably from the capital exporters' perspective is readily understandable. Not only does the supposed standard serve their economic interests but in some important instances the standard is infused with a deeply rooted passion. The standard is directly derivable from the Lockean significance attached to property, security in which in the United States, for instance, is given the specific constitutional protection of due process. It has been said by American courts that "the power of eminent domain, next to that of conscious conscription of manpower for war, is the most awesome grant of power under the laws of the land."

Rights in property formalise relations of people to things. In most western legal systems that relation operates bilaterally between an individual and an object. The relation is protected from interference by third parties and even the government role in the relation is de-emphasised. In other countries the relation is trilateral; thus individuals share their interests in property with the government. In these countries the rights of nationalised property holders are vindicated only to, an extent consistent with the public interest.4 In other countries the government has absolute rights to property and nationalisation without compensation is viewed as a just measure.5

At the turn of the century, when statesmen were heady with acquired rights and uninspired by notions of the welfare state, private property rights were considered absolutely inviolable.6 But the Russian Revolution and the national trauma of the First World War jolted governments into a recognition of the public interest in private property. While the taking of the property was considered acceptable, compensation had to be complete and paid in advance of the taking.7

Even these conditions have proven impracticable and incomplete. The value in investments has accelerated with the increase in scale of operations and consequently governments are often incapable of obtaining sufficient liquidity to pay in advance for nationalised property. Typical current practice includes a payment distributed over many years. Demands; for complete compensation have also moderated.

Nationalising countries have been both unable and unwilling to pay the full value of the operations of multinational companies. For instance, the government of Venezuela recently proposed to pay Exxon Corporation $512 million as compensation for the nationalisation of Exxon's Venezuelan oil properties. According to Exxon, this amount is $90 million less than the book value of the assets. Payment is to be completed over five years. Unofficial sources report that a total of $1-07 billion has been offered by the Venezuelan Government in compensation for all nationalised properties whose book value is estimated to be in excess of $5 billion.8

Part of the reason for the impracticality of a standard of "complete" compensation is its discrete nature. It is generally argued by capital exporting countries that "complete" pre-supposes "effective" compensation, that is, payment in a convertible currency. But "effective" is not a term of art. Developed countries claim that development aid tied to expenditure on exports from the donor nation is "effective." Is it consistent for these same countries also to maintain that compensation conditioned on expenditure in the nationalising countries is less than "effective"?

Current disagreements over the existence and meaning of an international standard for compensation of nationalised property reflect the different values attached to direct foreign investment on the opposite sides of the capital transfer. The Chilean nationalisation of its copper mines affords a useful case study.

According to Kennecott Corporation,9 owners of one of the expropriated mines (El Teniente), an American group headed by Braden obtained control. of the copper mine in 1904 when local and also foreign investors declined to become involved. It was the initiative of the Braden group that got the operation off the ground. For some twenty years net income was reinvested in the mine. Kennecott obtained control of the Braden group in 1915 for $38.6 million. By the end of 1926, Kennecott's investment totaled $72,234,199. In the years up to 1967, Braden's production increased by 4.9 per cent., 2.2 per cent. above the world growth rate.

The El Teniente mine was wholly owned and operated by Kennecott until 1967, when it voluntarily sold a 51 per cent. shareholding to the Chilean government. Braden lent the Chilean Copper Corp. $80 million to finance the purchase. Incorporated as part of the agreement was a plan to increase output by 55 per cent. at an estimated cost of $230 million. The expansion programme was financed with $110 million from the Export-Import Bank, $92.7 million from Braden, and $27.3 million from the Chilean Copper Corp. Later an additional $45 million was obtained in Italy and Japan; the Chilean Copper Corp. contributed $ 10 million more.

From 1916 to, 1970, Braden El Teniente produced for sale some $3.34 billion worth of metal. $2.491 billion was spent m Chile on labour (100,000 people over the years), materials, taxes and dividends to the Chilean Government. An additional $430 million was spent on imports of materials, freight, and services. Total Braden earnings were $509 million, or $9.3 million a year; this represents a rate of return of 13.7 per cent. On investment (0.1 per cent above Kennecott's world average rate of return).

Kennecott was proud of its health, housing and manpower development programmes. Infant mortality rates in the company hospitals were less than half the national average. In the latter years of Kennecott's stewardship, free medical services were provided by the company to its employees. The corporation also supported the training of medical personnel. The company financed and equipped one industrial and twenty-two general schools. Bursaries and scholarships were also made available. Investments by the company in housing for its employees totaled $45 million by 1970. These funds enabled employees to, obtain 1,400 homes on long-terra low-interest loans, with 3,000 more on the drawing boards at the time of nationalisation. What more, it may be asked, could Kennecott have done to promote economic and social development in Chile?

In the January 25, 1971, issue of the New York Times,10 the Chilean Copper Corporation (CODELCO) published. the Chilean Government's position. Since the mid-nineteenth century Chile had been producing copper. To have allowed foreign companies to achieve their present importance was an "historical error" because the current liberal economic policies were frustrated by the inability of domestic companies to meet the challenge.

The original American investment was only $3-5 million. The remainder of the investnents were financed from the resources of the Chilean people. The companies were managed in the American, not the Chilean interest. During the Second World War the American companies set Chilean prices lower than the market resulting in a loss of revenue of $500 million. In 1966, the Chilean operations contributed 90,000 tons of copper to the U.S. strategic reserve for the Vietnam war effort at a price of 36 cents a pound, some 24 cents below market price.

Chile's share of world output in the 20-year period preceding nationalisation declined from 30 per cent. to 20 per cent. In the years 1960-69, Chilean production increased by 27 percent. whereas world production increased by 31 per cent. Since output of small and medium sized Chilean. operations rose by 157 per cent. in this nine-year period, we are led to believe that Chile's failure to keep up with world growth was due to Kennecott's performance.

Whereas Chilean investments constituted 13.16 per cent. of Kennecott's world investments, Chilean profits accounted for 21.37 per cent. of the world profits. In the sixty-year period preceding nationalisation, Kennecott paid out to itself $10.8 billion. The total gross national product of Chile over its 400-year history was only $10.5 billion.

The CODELCO statement concluded:

This is the basic cause of our underdevelopment, the basic cause of our meager industrial growth, of our primitive

agriculture, unemployment, low wages, our very low standard of life, and it is the cause of our poverty and backwardness.

Thus, whatever may be the value of free-flowing foreign direct investments to capital exporting countries, their value as seen by capital importing countries is hardly unqualified. The point is that the promotion of an international standard for the settlement of investment disputes has not been, and indeed is never likely to be, successful when presented as a means of encouraging international investment.

The objective of harmonising political relations between nations would be a better rallying point for the formulation of standards of compensation for nationalised property. Beyond a nation's economic interest in protecting its nationals, there is also a sense of a sovereign power which is affronted by their unfair treatment. This feeling of responsibility is shared by the governments of capital exporting and capital importing countries alike. Whereas attitudes on the merits of foreign direct investment divide nations, the feeling of responsibility for protecting their nationals unifies them.


Given a commitment to promote an international standard as the fair way to settle international investment disputes, what remains to be decided is the meaning of a fair standard. There are basically three distinct alternative formulae by which to measure the compensation due for nationalised assets:

(a) there is no minimum level of compensation, thus a country may pay no compensation all;

(b) there is payable a sum that would effect restitution of what the company put into its nationalised operations: the "loss formula";

(c) there is payable a sum that would effect restitution as described in (b) and also compensate the company for the profits that could have been made had nationalisation not occurred: the "loss-plus" formula.

Support for the first formula is based on the complaint that Private ownership works an injustice on the people. Such wrongs against the people are corrected by nationalisation, they are not to be compensated. Countries such as the U.S.S.R. take this extreme position. This line of thought, when dissected, may not deny that compensation should be paid to nationalised companies. What it may mean is that the wrongs they have committed through abuse of their private property should be set off against the compensation for the nationalised property. In other words, a standard of compensation is decided upon when all other things are equal, and legitimate claims of damage through the abuse of the privately held property are offset. It remains then to evaluate the loss formula against the loss-plus formula.

The distinction between the loss and loss-plus formulae in damage qualification is known to most legal systems. It might-then, be thought simplest to apply local law in each case. The advantage, of applying, local law is that the difficulty of obtaining a universal consensus on the content of the standards would be circumvented. However, while most legal systems recognise -the distinction, between the loss and loss-plus formulae, the distinction operates in the context of providing a remedy where a wrong has been committed. Sinçe nationalisations are invariably proper according to local laws, there is a logical difficulty in relying on local laws to choose between the loss and loss-plus formulae.

The claim of equity in applying local laws rests on an assumed or implied. knowledge of the investor of the legal (and social) conditions in which the investment is made. There is supposed to exist a consensus in which the investor has made his decision as a result of calculations accounting for -the local legal parameters in the risk-reward trade-off. This is an untenable assumption where one party to the sup-, posed consensus holds the power to change the parameters at any time, especially where the other party's decision is a long-term and practically irreversible commitment.

We must therefore seek other principles, hopefully of general appeal, on which to choose between the loss and loss-plus formulae.

The choice between compensating the nationalised Company for the loss of its investment, or for the loss of its prospective profits also, pivots around one's philosophy of the nationalisation process. If nationalisation is seen as a recovery of what belongs to the nation, then, a restitutionary standard is appropriate. If nationalisation is seen as an (unjust) enrichment of the State, then the Company should be compensated for its lost profits.

Nationalisation typically makes its target foreign owners of major national resources. Where, as in many Latin American countries, it W the law that the government can grant no more than a concession in certain types of property, such as minerals, the investing company is put on notice that it can expect no more than monetary restitution for the value of its investments. The lost future profits belong to the nation because the resources from which the profits will be generated belong to it.

Where products are imported for processing and re-exportation, nationalisation takes only the value of the investment in plant. Once the value of its plant is restored, the nationalised company could presumably set up another plant and continue its operations elsewhere. Similarly where the profit potential of the nationalised plant lies in its technology, or products or personnel, or its goodwill, these non-tangible assets will be transferable and are inherently immune to nationalisation.

In short, the formula advocated here is that nationalised companies be compensated for their loss, so that there is restitution in integrum. Still to be considered, however, is the perplexing problem of applying the concept of restitution in the present context. Specifically the problem is to decide whether the measure of restitution is to be:

(i) the book value of the nationalised operations at the time of nationalisation, or

(ii) the net investment by the nationalised company defined to mean total investment, less investments financed through the ploughing back of profits, less repatriated, profits.

The first of these formulae is straightforward. It would require payment of a sum equal to the difference between the assets and the liabilities. Book values tend to be unrealistic in unstable economic situations. Thus book values of fixed assets may not equal replacement cost. Depending on the cycle in which the economy is moving at the time of nationalisation, the book value may over- or underestimate replacement value. One disadvantage of book value, then, is its unresponsiveness to economic cycles.11

In a different context, book value may underestimate the going-concern value to the corporation of the local operation where the nationalised facilities are unique for the way in which they are integrated into the corporate structure. But the going-concern value to the corporation of its operations does not necessarily coincide with its going-concern value to the government of -the local country. The company's loss may be greater than the country's gain. For instance, in the case where the going-concern value of the local operations has special significance for the firm because of its integration into world operations, the local facility may be of equal value to the country only if a comparable degree of integration is established. It would be unrealistic to presume that this will happen. Another feature of book value, then, is its potential to diverge from going-concern value. This potential for divergence is a major disadvantage of the book value approach.

The major difficulty with the use of book value as the standard of compensation is that it takes no account of the profits that have been made through the local facility. If the idea of restitution is to put -the company into the position it occupied before investment was undertaken, then profits will be relevant to the calculation. Thus, suppose a company has invested ten million dollars in a foreign facility, the original investment was two million dollars, seven million dollars were ploughed back profits and one million dollars more were invested at a later date by the parent corporation. If the objective of restitution is to return the corporation to the status quo ante its investments, the value of the compensation would be three million dollars. However, if the corporation has repatriated three million dollars in profits, then it is already in the position it was in before undertaking its investments and would be entitled to no compensation.12

Against this criterion of compensation, it might be argued that restitution should bc aimed at the company's position before the "wrong" occurred not at the position before theundertaking by the aggrieved party. In the present context, that would mean that restitution would place the company in the position it occupied before nationalisation occurred, not its position before investment occurred. This formula would yield book value, and prior profits would bc irrelevant.

But the object of restitution in integrum, at least as the concept is applied in the common law, is to return the "wronged" party to his position before the transaction began, not his position at the time of the events giving rise to the dispute.13

It might also be argued that failure to allow an investor a return on his investment as part of the compensation formula would remove the incentive for investment and encourage each country to nationalise at the point where no compensation would be payable. While these arguments can be made separately, each acts as a check on the other. Assuming that the proposed formula would discourage investment, a country using it would consciously discourage foreign investment. This it is certainly free to do. On the other hand, if a country wished to encourage foreign investment, then it would pay not minimum compensation, but a norm that will not frighten investors off. Thus the Canada Development Corporation, an investment company alternative to nationalisation, in 1973 paid five dollars more per share than the market price in a public tender offer for control of Texas Gulf Inc. No one would suggest that such compensation would have been mandatory in international law, had nationalisation been effected. Canada, because it wished to avoid discouraging foreign investment, chose an appropriate private buy-back vehicle. A country that is indifferent to, or opposed to foreign investment should be free to pay the minimum international standard of compensation.

The real question is whether it is fair to tolerate nationalisations that yield the investor no rate of return on his investment. More precisely, the question is whether a consensus could be reached that such a formula is fair. My view is that the capital exporting countries should accept the proposed standard as a minimum level to which they would be prepared to agree in the interests of achieving an international agreement that would let everyone know where he stands. Each investor could then decide whether its investment projects axe worthwhile, in consideration of the economic and the political risks, including the risk of being nationalised with no more than a "moneyback" guarantee. Where countries felt it necessary to provide more than the minimum compensation in order to, encourage foreign investment, they could define theïr policies accordingly.

This leaves open the question of how to compensate investors who established foreign operations before the adoption of the international standard. Their investments would normally have been made in anticipation of a return. Moreover, the capital importing countries themselves would have anticipated that the investors would be planning for a return on their investment. Should the investors be allowed the full value of the profits they earned or should there be a ceiling on the rate of return allowed and, if so, what would be a fair rate of return?

The first alternative would return the investor to the position he was in before nationalisation. But this is not the objective. The objective is to, return the investor to the position he was in before his investment, with some allowance as a return on his investment. An attempt must be made to define a " fair - rate of return. Yields on long-term international debt financing might be useful guides. The average levels of interest paid by the capital importing country at various times during the life of the direct investment would give some idea of the value of foreign capital to the country. The average rate of return on the company's worldwide investments should give some idea of the company's expected rate of return on its investments. The mean of these would reconcile the government's and the company's expectations.

Accordingly, the compensation formula for nationalised investments that were established before adoption of the international standard would take the investing corporation's net investments (ie. the initial outside investment which would exclude re-investments) and subtract the excess of repatriated profits over a fair profit margin. Then comes the problem of defining the circumstances under which a government would be entitled to deduct from the due compensation sums in reparation of wrongs to the country by the investing corporations. In general, such charges are abhorrent because they constitute retroactive legislation. If a company breaks an existing law, there is no legal or moral objection to setting off the fine or damage against the nationalisation award. But, where the nationalisation law declares that the company has failed to meet a standard pronounced only at the moment of the nationalisation, the thread of justice is stretched to breaking-point.

On the other hand, it is also true that exploitation by local and foreign economic interests can, in theory at least, be so grievous as to justify retroactive sanctions. Suppose for illustration purposes, that the black peoples of South Africa took over power and seized a foreign manufacturing concern which had practised apartheid. How could there be objection to the imposition of retroactive sanctions against such a company for its treatment of black people and its retardation of their development?

Beyond recognising in principle the availability of set-offs against the compensation due to nationalised enterprises, it is difficult to formulate the precise boundaries of the wrongs which would give rise to the set-off. Given the minimum level of compensation suggested here, wrongs would have to be very serious violations of human rights, and unjust in a fundamental sense, to bring into play the set-off.


In conclusion, it is worthwhile considering -the effect of the standard on the flow of foreign investments in the future. Foreign direct investments are very important outlets for exports, as well as sources of income and bases for world market power. But it is for these very reasons that direct investment is likely to decrease in significance in the long run relatively to other forms of international economic co-operation. Capital importing countries are increasing the controls on new direct investments and are creating various vehicles with which to buy back their economies. A United Nations study has observed this trend and predicted (implicitly encouraging) capital importing countries to institute as alternatives to 100 per cent. foreign-owned projects, arrangements such as joint-ventures, turn-key operations and management contracts.14

Generally, multinational corporations have preferred not to become involved in alternatives to direct investment. They have reasoned that they would be failing to maximise their own profits by sharing them with a partner for whom they have no real need anyway. That, however, is an approach that must and, it is hoped, will change.

Moreover, two factors act as prophylactics to cushion the shock of nationalisation. One is the tendency to assume that nationalisation, if it does happen, will strike at some other target. Another is the inclusion of the expropriation risk as a factor in the calculation of the required rate of return on investment. Investments in the countries that have thus far engaged in nationalisation have tended to be of two types: venture-capital, the return on which is a high risk matter independent of nationalisation but which would tend to be high if successful; and market control investments where the primary motive is market power and return may be negligible. In either case, the totals of the investment generally amount to a relatively small part of the company's world assets. The hypothesis deducible from these factors is that investment flows are not seriously impaired by isolated nationalisations.

There is empirical support for that hypothesis. Statistics on volume of direct foreign investment are very difficult to, find, because very few countries require corporations to disclose the value of their assets, which in any case could only be an approximation. However, some idea of investor behaviour can be gleaned from the movement of foreign currencies held by foreign banks in countries engaging in nationalisation programmes. In cases of instability, whether from economic or political causes, banks prefer not to hold foreign exchange reserves, which are very tempting targets for socialisations.

Through the early months of 1968, dollar assets holiday U.S. banks in Peru hovered around the 260 million mark. On October 9~, 19~68, the Peruvian government seized the La Brea y Parinnas oil fields of the International Petroleum Corporation. On February 6, 1969, the government demanded $690,524,283 in compensation. In the last quarter of 1968, dollar holdings by U.S. banks increased slightly. By the end of the first quarter of 1969, there was less than a one per cent decrease and this was more than offset by the increase in dollar holdings of Peruvian banks.15 These facts suggest that foreign banks and theïr customers showed few signs of panic.

The Chilean experience is similar. Long after the nationalisation of the copper mines, American banks continued to hold large amounts of dollar assets. When the withdrawal did start, the motive was fear of the instability of the Chilean company.16

Arguably, the behaviour of bankers with their highly mobile currencies is not a perfect clue to the behaviour of investors in fixed assets. On the other hand, though a fixed investor may have more difficulty in getting outthan a bank, he may not be as attractive to a radical government, especially if the investment is a low profile one by local standards.

Thus the effect of nationalisations, at whatever level of compensation, is overestimated as a disincentive to foreign direct investments by multinational corporations. In any case, foreign direct investment is not the preferred mechanism for financing international development. In this reasoning lies the hope of defusing of its explosiveness the current controversy over compensation of nationalised property. The proper standard of compensation must be defined in terms of what is fair rather than what will or will not encourage foreign direct investment. Fairness is an elusive concept and it is slippery in its application, but notions of equity are universal and underlie most legal systems. It is the notion of equitable restitution that offers the potential of a widely accepted standard for the compensation of nationalised property.


1 - See Lillich, Richard B., The Valuation of Naïionalised Property in International Law (University Press of Virginia, 1972); especially the chapters on " Contemporary 'United States Practice."

2 - U.S. v. Reynolds, 90 S.Ct. 803 (1970).

3 - Winger v. Aires, 89 A.2d. 521 (Suly.Ct.Penn. 1952).

4 - For instance, the Constitution of the Federal Republic of Germany, art. 1413, invites consideration of both public and private interestsin nationalisation cases.

5 - Katzarov, Konst, Théorie de la Nationalization (University of Paris Press, Paris, 1960), at p. 426.

6 - See, for instance, the resolutions of the Ninth, Conference of La Haye, 1907.

7 - These viewpoints were reflected in the resolutions of the Conference of the International Law Association at Oxford in 1932.

8 - Wall Street Journal, Oct. 20, 1975, at p. 4.

9 - El Teniente (Kennecott Corporation, New York, 1969).

10 At p. 72.

11 - Book values are not completely insulated from economic cycles. Thus the value fluctuations of current assets and the consequent effects on retained earnings are reflected in the balance sheet. But current assets as a Percentage of total assets are generally relatively small compared to the value of fixed assets.

12 - With this approach to restitutional compensation, complexities arise in the treatment of depreciation and long-term liabilities. The logic of the theory under consideration is that the corporation should be returned to the position it occupied before undertaking the investment. Hence depreciation, which is a charge subsequent to the investment, should not reduce the value of the original investment for present purposes. However, depreciation which is a charge against income would have to be added to the value of the profits in the present calculations. These "cash flow" profits could be apportioned between repatriated and reinvested profits using the actual rernittance rates. Liabilities that are unpaid at the time of nationalisation is obligations incurred after undertaking of the investment. However, they represent inflows to the corporations which have either increased assets or revenues and which are a charge on the operations of the corporation. Therefore liabilities should be a deduction in the present calculations.

13 - For instance, in The Restatement of Restitution (student ed.), p. 178.

14 - Multinational Corporations in World Development- (1973), pp.- 83-85.

15 - International Financial Statistics (1969).

16 - Paul E. Sigmond, "The Invisible Blockade and The Overthrow of Allende" (1974) 52 Foreign Affairs, No. 2, p. 322, esp. at pp. 326 and 335-336.

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