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Defending Against Expropriation in Latin America

The case of the state’s latest triple-pronged attack on TNK-BP serves as an important reminder that Russia’s investment environment remains about as stable and law-abiding as it was during the height of the Yukos theft – appeals in local courts against the charges of industrial espionage or regular procedural compliance with Oleg Mitvol’s environmental watchdog can not be counted upon to be fair and impartial. However what is happening to BP is not a uniquely Russian phenomenon, but is rather a frequent problem for investors working in emerging markets – the state often sees a foreign-owned asset or property that it desires (specifically benefiting certain officials), and bends the rules in order to obtain it, or secure a larger participation. It is what happens when a country lacks rule of law. My law firm has worked for many years with individuals, private businesses, and corporations doing business in some of the most challenging markets, and we have seen that all too often many of these groups limit their choice of legal options to lengthy and expensive arbitration forums when confronted with an expropriatory state. However, specifically in Latin America, there are many possible avenues to pursue under international law, including human rights and constitutional legal protections to protect against the seizure of property, especially in politically sensitive cases. I was recently in contact with my colleage Dr. Douglass Cassel, a law professor at Notre Dame, who prepared a short briefing note on the potential remedies for expropriations under the Inter-American human rights system. I share Doug’s paper below for those who may find it of interest.

REMEDIES FOR EXPROPRIATIONS OR SEIZURES OF PROPERTY IN THE INTER-AMERICAN HUMAN RIGHTS SYSTEMDouglass CasselNotre Dame Law SchoolMarch 20, 2008In the event of an expropriation, seizure or occupation of property in a State Party to the American Convention on Human Rights, what remedies are available before the Inter-American Commission or Court of Human Rights?The short answer is that an individual property owner, or a shareholder in a corporate owner (but not the corporation itself), could file a complaint before the Commission for breach of the rights to property and to “just compensation” under Article 21 of the Convention. The owner could further allege a violation of the State’s duty, under Articles 1.1 and 2 of the Convention, to take reasonable measures to affirmatively safeguard the right to property. Depending on the manner of the taking and extent of compensation, the owner could eventually prevail before the Commission and the Inter-American Court, after several years of litigation. The Court could order payment of just compensation and, depending on the facts, restitution as well. However, the owner could not likely secure emergency injunctive relief from the Commission at the outset. And before filing, the owner would have to exhaust domestic remedies for a wrongful taking, unless he or she satisfies an exception to the exhaustion rule.Analysis:Right to Property:Article 21 of the Convention provides in relevant part as follows:1. Everyone has the right to the use and enjoyment of his property. The law may subordinate such use and enjoyment to the interest of society.2. No one shall be deprived of his property except upon payment of just compensation, for reasons of public utility or social interest, and in the cases and according to the forms established by law.Both aspects are important: the right to “use and enjoyment” of property under Article 21.1, and rights in regard to takings under Article 21.2.As authoritatively interpreted by the Inter-American Court, article 21.2 imposes five tests for a lawful taking. The taking must (1) pay “just compensation,” (2) serve “public utility or social interest,” (3) be in a case provided by law, (4) follow the forms established by law, and (5) otherwise comply with the Convention (e.g., by meeting standards for due process of law, which include, for example, independent and impartial courts).A State would have to meet all five tests. Whether it could do so would depend on the facts. For example:• An uncompensated expropriation would clearly fail the test of just compensation.• A popular occupation of property, coupled with a failure by the State to take or permit reasonable efforts to protect the property, would almost certainly not be a case or follow the form established by law, as required by article 21. In addition, the State’s failure to take reasonable measures to protect the property would violate its affirmative duty under article 1.1 of the Convention to safeguard the exercise of Convention rights.• A taking incident to a palpably unfounded criminal proceeding might well fail the test of “public utility or social interest.”Of course, a State could choose to take the property according to the cases and forms of domestic law, for a public purpose, with compensation, and via proceedings that meet standards of due process of law. If so, the main issue would be the adecuacy of compensation. While the Inter-American system apparently has not yet ruled on the test for “just compensation,” the European Court of Human Rights allows States a wide “margin of appreciation” in setting the amount of compensation for property takings. The Inter-American system often relies on European precedent and would likely follow this approach.Inter-American Precedent on Right to Property.As an international judicial body the Inter-American Court does not technically follow the common law doctrines of precedent or stare decisis. In practice, however, it follows its earlier rulings to the same degree as would a common law court.Although the Inter-American Court has decided several cases in which it found violations of the right of property, it has not ruled in any case of expropriation, nationalization, or popular occupation or seizure of property. Nor has my research to date found any such case decided on the merits by the Commission.However, two precedents are particularly relevant: the Inter-American Court’s judgments in Ivcher-Bronstein v. Peru, Judgment of Feb. 6, 2001, and Chaparro-Alvarez v. Ecuador, Judgment of Nov. 21, 2007.Ivcher-Bronstein v. Peru (2001).Mr. Ivcher, a nationalized Peruvian citizen, was majority shareholder of a TV station that exposed corruption and human rights violations by the Fujimori regime. In retaliation, Fujimori unlawfully revoked his Peruvian citizenship. This, in turn, rendered Ivcher ineligible to own a TV station. A Peruvian court order barred him from exercising his rights as majority shareholder. He was paid no compensation.The Inter-American Court made the following relevant rulings:• Definition of Property. “Property” under the Convention includes “those material objects that may be appropriated, and also any right that may form part of a person’s patrimony; this concept includes all movable and immovable property, corporal and incorporeal elements, and any other intangible object of any value.” (Par. 122.)• Shareholder Property Rights. Ivcher’s “participation in the share capital” of the corporation “could be evaluated and formed part of its owner’s patrimony from the moment of its acquisition; as such, that participation constituted a property over which Mr. Ivcher had the right to use and enjoyment.” (Par. 123.)• Realities of Takings. To determine whether he was deprived of his property, “the Court should not restrict itself to evaluating whether a formal dispossession or expropriation took place, but should look beyond mere appearances and establish the real situation behind the situation that was denounced.” (Par. 124.)• Violations. Peru’s taking of his property was arbitrary, violating Articles 21.1 and 21.2 of the Convention. (Par. 131.) In fact, Peru violated all five tests of Article 21.2. There was no evidence that the Peruvian judicial order preventing Ivcher from exercising his rights as majority shareholder “was based on reasons of public utility or social interest.” (Par. 129.) Nor was the taking compensated or according to law or lawful procedures. And the procedures utilized also violated due process of law as required by Article 8 of the Convention. (Par. 130.)• Remedies. The Court ordered both restitution and compensation — according to domestic Peruvian law and procedures — as follows: “the State should facilitate the conditions to enable … Ivcher … to take the necessary steps to recover the use and enjoyment of his rights as majority shareholder …, under the terms of domestic legislation. With regard to the recovery of dividends and other amounts that he would have received as majority shareholder and officer of that company, domestic law should also apply. To this end, the respective claims should be submitted to the competent national authorities.” (Par. 191.8.)The Ivcher Judgment thus establishes that a shareholder’s interest is a compensable property right. Further, in the event of a seizure of property in connection with a questionable criminal proceeding, or a popular occupation with government support or acquiescence, the Court would look to beyond formalities and appearances to the “real situation.” If the purported reason for the taking were arguably or obviously pretextual, the Court has shown itself willing to find that there is no legitimate public purpose for a taking.In regard to the potential remedy, two points are significant. First, the Ivcher Court awarded both compensation and restitution. However, in that case the property had been transferred to another private investor. Suppose a State seized property and then simply kept it. In that event, so long as the Inter-American Court found a proper public purpose for the taking, then despite violations of due process or legal form, restitution might be denied, and the remedy limited to compensation.Second, the remedies were in any event to be those allowed by domestic law and were to be pursued before domestic courts. Such remedies could of course pose complications and delays in securing real relief before domestic courts and agencies.Chaparro-Alvarez v. Ecuador (2007).The second key precedent, Chaparro v. Ecuador, reaffirms aspects of Ivcher, while also improving on the manner of compensation, by ordering a remedy of arbitration, rather than requiring the property owner to pursue domestic administrative or judicial proceedings.Chaparro is also especially relevant in the event a State were to use criminal proceedings against a property owner as the basis to seize his or her property. Mr. Chaparro was a 50% shareholder and general manager of an Ecuadoran company that manufactured refrigeration equipment for transportation vehicles. When the authorities found traces of drugs in refrigerators at the Guayaquil airport, holding fish for export to the US, they arrested him. In connection with the criminal proceedings, they seized his factory and rented it out to another private businessman. Even though no evidence of guilt was found, Chaparro was held in preventive detention for over a year. The factory was not returned to him until after five years, and even then in bad condition, with some items of inventory missing. In addition, Chaparro was required to pay an administrative fee to the government for its costs of administering his property.The Inter-American Court held that while provisional seizures of property pending criminal proceedings are not per se arbitrary, the manner in which Chaparro’s property was seized and held was arbitrary:• Administration Fee. The administration fee was inconsistent with his right to be presumed innocent in the criminal case, and violated his right to “use and enjoyment” of property under Article 21.1, read together with the State’s affirmative obligations to guarantee human rights under Articles 1.1 and 2 of the Convention. (Par. 195.)• Link of Property to Crime. Once Ecuadoran authorities determined that no evidence linked the factory to the drug crime, and there was no judicial finding that continued seizure of the factory was necessary for purposes of the criminal investigation, the continued holding of Chaparro’s factory was arbitrary and disproportionate, violating Article 21.1, read together with Article 1.1 of the Convention. (Par. 199.)• Delayed and Deficient Return. The eventual return of the factory to Chaparro was arbitrary, because it was unjustifiably delayed, some inventory was missing and some equipment was in bad condition, further violating Article 21.1, read together with Article 1.1 of the Convention. (Pars. 204, 209, 214.)Since Chaparro’s factory had already been returned to him, there was no need to order restitution. The Court recognized that the “just” amount of compensation to be paid was a complicated matter, requiring “assessment of the commercial value of the enterprise, which could include, among other things, the property, the financial situation, the investments of capital and goods and their values, operational and marketable, cash flows, market expectations and other items …” (Par. 232.)Since the evidence of these values before the Court was insufficient, the Court ordered that the amount of compensation be submitted to an arbitral tribunal of three members: one chosen by Chaparro, one by the State, and the third by the first two or, failing agreement, by the Court. (Par. 233.) As a minimum compensation, the Court awarded Mr. Chaparro $150,000. The eventual arbitral award could not reduce, but could increase, this amount. (Par. 232.)Timing of Relief:Depending on the manner of any taking, the text and jurisprudence of the Convention thus supply potentially abundant arguments to an owner in the event of an expropriation, seizure or occupation of property. However, two points are important in connection with the timing.First, the Commission would almost certainly not grant any form of emergency injunctive relief at the outset of the proceedings. Such relief is ordinarily limited to cases involving imminent threats to life or limb. If the property were seized, the owner would likely face several years of litigation before the Commission and, if the State refused to accept a Commission ruling, before the Inter-American Court, before securing any relief.Counsel might nonetheless invoke the prospect of litigation before the Commission, or of an informal intervention by the Commission, in an effort to forestall an imminent taking. However, this would not likely work if a State were truly intent on taking the property.Second, before filing with the Commission, the owner would have to exhaust domestic remedies, unless the owner met one of the exceptions to the exhaustion requirement: (1) denial of access to the domestic proceedings, (2) the domestic proceedings violate due process or (3) are unduly delayed, or they are (4) ineffective or (5) inadequate.Current Commission practice is fairly strict in requiring exhaustion before initiating the processing of a complaint before the Commission. It is not enough, for example, to show that domestic courts generally lack independence and impartiality; a property owner would have to show evidence of a lack of independence or impartiality in the particular proceedings involving the owner.In order to assess the prospects of exhaustion of domestic remedies (or of meeting one of the exceptions), it would be important to obtain advice of local counsel on the domestic remedies for property takings or occupations, both formally and in reality.Conclusion:In the event of an expropriation, seizure or popular occupation of property, done without sufficient attention to domestic law and procedure, or without compensation, a property owner would have ample grounds to succeed in an eventual case before the Inter-American system. But at the outset, the owner could not likely secure emergency or injunctive relief from the Inter-American system, and the filing of an Inter-American complaint might well have to be delayed in order to exhaust domestic remedies, or to show that they are deficient or inadequate.