Amaaeyene Enang esq and Anem Akpan Esq


This paper undertakes an examination of expropriation through a review of the arbitration decision and award in the case of Methanex Corp. v. The United States of America. It is our opinion that though the decision in the Methanex Case does not establish a binding precedent on future arbitration proceedings, the decision of the Tribunal in that case offers an illuminating insight on the principle of expropriation.

This is even more so because the Methanex Tribunal rejected the approach formulated by the arbitration Tribunal in Metalclad Corp. v. United Mexican States on the scope of measures tantamount to expropriation. The Methanex Case inquired into indirect expropriation and whether it could include any measure with significant economic effect on the investor, regardless of motivation.

Though no universally acceptable definition exist, expropriation in its traditional context connotes the taking of foreign investments by a host government. In the Amoco International Finance Corp v. Iran, the US-Iran Claims Tribunal defined expropriation as the “compulsory transfer of property [which], may extend to any which can be the object of a commercial transaction i.e. freely sold and bought, and thus has a monetary value”.

Expropriation thus occurs when a host State interferes with the proprietary interest of a foreign company. The right of a State to expropriate a foreign investment has long been recognized and accepted in international law. The United Nations General Assembly on Permanent Sovereignty over Natural Resources 1803 stipulates the grounds upon which the expropriation of foreign investment can be undertaken by a State. According to Resolution 1803[XVII] “expropriation or requisitioning shall be on grounds of public utility, security of national interest which are recognized as overriding purely individual or private interest, both domestic and foreign. In such cases the owners shall be paid appropriate compensation in accordance with rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law.”

Furthermore, the UN Charter on Economic Rights and Duties of States 1974 recognizes the right of “each State to nationalize, expropriate or transfer ownership of foreign property…”

In its conventional form, expropriation involves the taking or transfer of ownership of foreign investment in such a way and manner that deprives the foreign investor of his proprietary interest in such an investment. In this form, expropriation is often devoid of controversy. Interpretational problem however arises with what has come to be termed indirect or constructive expropriation. Can it be said that expropriation has occurred in the absent of actual taking or transfer of proprietary interest or where an investor alleges expropriation in circumstances when the action complained of has not conferred any benefit on the host State?

The Regime of Indirect Expropriation
It is now an acceptable rule of international investment law that certain actions or measures of a host State which are short of actual ‘taking or transfer’ can amount to expropriation. Indirect expropriation may arise from arise from measures, whether regulatory or not taken by a State which interferes with the interest held by a foreign investor so as to drastically reduce the value of such rights or render them nugatory.

According to UNCTAD “indirect expropriation may occur when measures short of actual taking results in the effective loss of management, use of control, or a significant depreciation of the value of the assets of a foreign investor.” In Starret Housing Corp. v. Iran (Interlocutory Award), the Iran-US Claims Tribunal held that “… it is recognized in international law that measures taken by a State can interfere with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated, even though the State does not purport to have expropriated them and the legal title to the property formally remains with the original owner.”

A vast majority of Bilateral investment Treaties (BITs) give recognition to indirect expropriation without elaborating further on the term by way of definition. For example, Article 5 Para 2 of the Germany-Nigerian Bilateral Investment Treaty provides that “Investment by investors of either contracting parties shall not directly or indirectly be expropriated, nationalized or subjected to any other measures the effect of which would be tantamount to expropriation or nationalization in the territory of the other contracting party…”
Furthermore, Article 1110 of the North American Free Trade Agreement ( NAFTA) 1992 upon which the Methanex Case was based provides that “ No part may directly or indirectly nationalize or expropriate… or take a measure tantamount to nationalization or expropriation of such an investment.”

The term indirect expropriation is sometimes used interchangeably with creeping, disguised, consequential, constructive or regulatory expropriation.

Essential Background
Methane Corporation (Methanex) is a Canadian-based manufacturer methanol, an ingredient in a gasoline additive commonly called MTBE ( methyl tert-butyl ether). Methanex did not manufacture MBTE itself; however a significant percentage of methanol it produced were used in making MBTE.

After safety concerns were raised by environmental activists and confirmed in expert studies, the State of California banned the use of MBTE as a gasoline additive on account of its pollution of surface and ground water in the State. This measure of ban imposed by the State of California prompted Methanex to resort to arbitration in accordance with the provisions of NAFTA 1992.
Methanex argued that the State ban was motivated by a political deal with a rival company that makes ethanol, a substitute for methanol and MTBE as gasoline additive. Without alleging any loss of physical property, Methanex claimed that the measures adopted by the State of California was tantamount to both direct and indirect expropriation under Article 1110 of NAFTA because it substantially diminished the value of its investment in the United States.

Methanex furthered argued that the regulatory ban on MTBE amounted to a ‘taking’ which gave rise to compensation.
In support if its submission, Methanex relied overwhelmingly on the approach to expropriation enunciated by the arbitration tribunal in the Metalclad v. Mexico decision. The Metalclad Case which preceded the Methanex Case by five years established a curious new order within the regime of expropriation. The Tribunal in the Metalclad Case held that the denial of fair and equitable treatment …amounted to a breach of Article 1110 of NAFTA (which dealt with expropriation). The Tribunal in the Metalclad Case further explored the economic impact test as the prevailing criteria in determining whether a regulatory measure could amount to expropriation.

The Tribunal in exploring this criteria stated that “…expropriation under NAFTA not only includes open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be economic benefit of the property even if not necessarily to the obvious benefit of the host State”.

The approach adopted by the Metalclad Tribunal disrupted the applicable international law standard on expropriation. By relegating the purpose and nature of a government measure, the Metalclad Case created a brief legacy of uncertainty with regards to expropriation.
Predictably, the Methanex Tribunal rejected the Metalclad approach in favour of a more conventional approach of international law on expropriation. This approach does not qualify government measures taken in the exercise of its customary police powers as expropriation. The Tribunal held that “… as a matter of general international law, a non-discriminatory regulation for a public purpose which is which is enacted in accordance with due process and, which affects, inter alios, which affects a foreign investor or investment is not deemed expropriatory and compensable…” According to the Tribunal expropriation cannot arise where regulatory measures are non-discriminatory and are for a public purpose. Departing from the uncertain approach of the Metalclad Case, the Methanex Tribunal rejected the position that regulatory measures amounted to direct or indirect expropriation once it is established that such measures have occasioned a significant economic impact on an investor. Hence, the Tribunal further held that “from the standpoint of international law, the Californian ban was a lawful regulation and not expropriation”

On the Issue of Caveat
The Methanex Case also explored the effect of caveats inserted into international investment treaties. On the presence of a caveat contained in the agreement between Methanex and the State of California, the Tribunal held that regulations do not constitute expropriation “… unless specific commitments had been given by the regulating government to then putative investor contemplating investment that the government would refrain from such regulation[ Final Award, Part IV, Chapter D, Para 7]. It follows that where a host government reneges on its previous commitment (not to enact regulatory measure) by actively pursuing such measures, such can give rise to a finding of expropriation.

However, the Tribunal found no such caveat existing in favour of Methanex. The Tribunal further held that even if such caveats were to exist, it could not operate to restrain the State of California from enacting regulatory measures directed at Methanex. The Tribunal reasoned that as California was a jurisdiction popular for being a standard-bearer on environmental protection, investors in the State should expect that their activities would be subject to public debate and regulation if found to be detrimental to the environment.

The Tribunal in the Methanex Case moved away from the economic impact approach in ascertaining whether a regulatory measure by a host government amounted to expropriation. It follows from the decision of the Tribunal that a non-discriminatory regulation for public purpose enacted in accordance with due process cannot by itself amount to expropriation. In line with this approach, it is irrelevant whether such measures have adversely affected the proprietary interest of an investor.

The determinant factor on the existence or otherwise of expropriation, whether direct or indirect according to the Methanex Tribunal is the presence or absence of a specific commitment not to enact regulatory measures.
Despite its non-binding nature on future arbitration proceedings, the Methanex approach to expropriation, though not free from controversy has come and will continue to contribute immensely to our understanding of the complicated concept of expropriation.

Nathalia Bernas Coni-Osterwalder and Lise Johnson, International Investment Law and Sustainable Development : Key cases from 2000-2010. Available at (assessed 12 August 2016

Howard Mann, The Final Decision in Methanex v. United States, Some New wine In Some New Bottles 2000. Available at…/commentary-methanex (assessed on 13 August 2016)

Metalclad Corp. v. United Mexican States ARB/AG)/97/1. Available at ( assessed 13 August 2016
Methanex Corp. v. The United States of America, UNICITRAL, Available at (assessed 12 August 2016)
North American Free Trade Agreement. Available at ( assessed on 12 August 2016)
Starret Housing Corp v. Iran [Interlocutory Award] No. ITL 32-24-1, 19 December 1983. Available at (assessed 13 August 2016)
Suzy H. Nikiema, Best Practices: Indirect Expropriation. Available at (assessed on 13 August 2016)

Amaaeyene Enang esq Anem Akpan Esq

*Amaaeyene Enang is currently a practicing Lawyer at Owerri.

*Anemuyem Akpan is coordinator of Nigerian League of International Lawyers. He is engaged in Private Practice in Lagos

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