"Important New U.S. Appellate Decisions for Corporations Claiming Against Foreign States for Asset Expropriation"

by Skadden, Arps, Slate, Meagher & Flom LLP
Contact

Skadden

[author: Timothy G. Nelson]
 

The United States has signed approximately 41 Bilateral Investment Treaties (BITs), 12 Free Trade Agreements (FTAs) and 20 Friendship, Commerce and Navigation treaties (FCNs) with foreign governments, each providing guarantees against expropriation or other hostile state measures. Most BITs/FTAs allow arbitration under the rules of the International Centre for the Settlement of Investment Disputes (IC-SID) or the United Nations Commission for International Trade (UNCITRAL). Recent BIT awards include: 

  • SGS Société Générale de Surveillance S.A. v. Paraguay (ICSID 2012) (awarding $57 million against host state that failed to pay money due under a customs services contract, in breach of an "umbrella" clause in the Swiss-Paraguay BIT); 
     
  • White Industries Australia Ltd. v. India (UNCITRAL 2011) (awarding approximately AUD $4 million for failure to honor an earlier arbitral award, in breach of certain provisions of the Australia-India BIT); and 
     
  • Gemplus S.A. v. Mexico (ICSID Additional Facility 2010) (awarding approximately $16.3 million for expropriation of a car registry business, in violation of the France-Mexico and Argentina-Mexico BITs).  

Two recent decisions of the U.S. Court of Appeals for the District of Columbia have illuminated the opportunities and risks involved in pursuing expropriation claims against foreign states.

BG Group v. Argentina

In BG Group v. Republic of Argentina, 665 F.3d 1363 (D.C. Cir. 2012), the D.C. Circuit vacated, on jurisdictional grounds, a $185 million UNCITRAL arbitral award that had found Argentina in breach of the UK-Argentina BIT. That dispute originated with Argentine government decrees in 2001-02 that "pesified" energy utilities' contracts, redenominating tariffs from U.S. dollars to Argentine pesos. In 2003, a UK investor in an Argentine utility instituted an UNCITRAL arbitration against Argentina under the BIT. In 2007, after a full hearing, an UNCITRAL tribunal issued an award finding pesification "unfair and inequitable" and rejecting Argentina's challenges to jurisdiction. In 2010, the UNCITRAL award was upheld by the D.C. Circuit.

In January 2012, the D.C. Circuit granted Argentina's appeal and vacated the UNCITRAL award in its entirety. It focused on Article 8(2) of the BIT, stating that UNCITRAL arbitration could be sought "after a period of 18 months ha[d] elapsed from the moment when the dispute was submitted to the competent tribunal" in the host state. In the D.C. Circuit's view, Article 8(2) required a UK claimant to litigate its grievances in the Argentine courts for at least 18 months prior to instituting UNCITRAL arbitration. Although the UNCITRAL tribunal had earlier rejected Argentina's attempt to invoke the 18-month requirement, its views were not dispositive because (in the D.C. Circuit's opinion) "a court cannot lose sight of the principle that led to a policy in favor of arbitral resolution of international trade disputes: enforcing the intent of the parties." It concluded that the UNCITRAL tribunal had thus exceeded its authority for purposes of Section 10 of the Federal Arbitration Act. Subsequent petitions for panel rehearing and en banc review were rejected. 

McKesson v. Iran

An investor's expropriation claims were upheld in McKesson Corp. v. Islamic Republic of Iran, No. 10-7174, 2012 WL 615831, at *1 (D.C. Cir. Feb. 28, 2012), on a novel basis. In the early 1980s, McKesson's 31 percent interest in Pak Dairy, an Iranian agricultural business, was "frozen out" by the government, prompting McKesson to sue Iran for expropriation in a Washington, D.C. federal court.

After a lengthy process (including a failed reference to arbitration), a D.C. district court eventually found that Iran indeed had confiscated McKesson's investment and that the country's actions were "commercial activities" and thus not covered by sovereign immunity. Identifying the precise legal basis for recovery, however, proved problematic. In 2008, the D.C. Circuit ruled that, although Iran was bound by an FCN with the United States (a 1955 "Treaty of Amity") that barred Iran from confiscating property of U.S. nationals except upon "prompt payment of just compensation," the FCN did not create a private right of action for U.S. citizens. The D.C. Circuit nevertheless held that a cause of action might arise on other legal grounds. On remand, the D.C. district court held: (1) the expropriation violated both customary international law and Iranian law; (2) Iranian law (in contrast to U.S. law) recognized a private law remedy under the FCN for expropriation; and (3) McKesson was entitled to damages.

On February 28, 2012, the D.C. Circuit upheld Iran's liability for expropriation, but solely on the basis that Iranian law permitted a direct claim under the FCN. It held that private claims cannot be made in the U.S. courts for violation of customary international law. Thus, although the "commercial activities” exception in the FSIA only referred jurisdiction to the federal courts, and "create[d] no cause of action," the court held that "under Iranian law, [the FCN] provides McKesson with a private right of action against the government of Iran." Thus, the court awarded damages for "the expropriation of McKesson's equity interest in Pak [Dairy] and the withholding of McKesson's dividend payments."

Implications

McKesson indicates a potentially useful basis for litigating expropriation claims against foreign governments that are party to an FCN. The opinion suggests it may be possible to invoke against a foreign government all of the provisions of its own internal law ― including treaties to which that government is a party, provided that such treaties form part of its internal domestic law and that they support a private damages claim. BG Group, by contrast, reminds investors that a BIT expropriation claim, even if upheld by an eminent panel of arbitrators, may be vulnerable to jurisdictional challenge if the investor fails (or is held to have failed) to observe the "gateway" prerequisites to arbitration contained in the relevant BIT. It illustrates the risks of failing to adhere to such provisions, as well as the importance of the choice of hearing place or "seat" for international arbitrations, particularly those governed by UNCITRAL rules ― which, unlike arbitrations conducted under the ICSID Convention, are subject to review and possible annulment in the courts of the place in which they are made (such as, in this instance, Washington, D.C.). 

Download PDF Version

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP
Contact
more
less

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!