Legal Analysis of Indirect Expropriation Claim Under Korea-Us Fta

On June 30, 2007, the United States and the Republic of Korea signed the U. S. -Korea Free Trade Agreement (“KOR-US FTA”). After 4 years of a long delay caused by political oppositions against the ratification, Congress finally approved the agreement on October 12, 2011, and Korea’s National Assembly subsequently approved it on November 22, 2011. The United States and Korea completed their review of the measures both sides had taken to implement the FTA and exchanged diplomatic notes on February 21 agreeing to bring the agreement into force on March 15, 2012.

Like other FTAs that the United State has already concluded, KOR-US FTA covers a wide range of subjects that have plagued the trading relationship for decades and these subjects are reflected in the final text of the agreement. With respect to the subject of investment, the KOR-US FTA Chapter 11 governs the admission and protection of foreign investments in host countries. Specifically, this Chapter provides several provisions prescribing the government from expropriating foreign investments directly or indirectly without awarding foreign investors “prompt, adequate, and effective” compensation.

However, there is growing concern in both countries that considerable ambiguity over the standard for determining an indirect expropriation may make legitimate governmental regulations susceptible to foreign investors’ relentless legal challenges. A series of controversial NAFTA Tribunal decisions have also heightened such a concern. Furthermore, the incorporation of the investor-state dispute (ISD) mechanism in KOR-US FTA opened the door for foreign investors to bring an expropriation claim without procedural difficulty against the host country’s regulatory measures that may affect their investments, because the ISD procedure effectively 2

eliminated complicated procedural hurdles that foreign investors would have to overcome if they filed the claim in international or domestic courts. To mitigate difficulty caused by blurred distinctions between an indirect expropriation and a government action that does not trigger a compensation obligation, this Article will attempt to shed light on the interpretation of indirect expropriation in the context of KOR-US FTA.

At the beginning chapter, for purposes of providing background knowledge, the Article will provide a brief history of bilateral investment treaty (BIT) and trace the origins of the expropriation provisions found in KOR-US FTA. In the next chapter, the Article will evaluate the influence of the NAFTA Chapter 11 on the expropriation provisions of KOR-US FTA, and attempt to discover discrepancies between the NAFTA Chapter 11 jurisprudence and the U. S. Taking Clause jurisprudence.

Particularly, this chapter’s analysis will offer a helpful insight on understanding of the textual improvement made in KOR-US FTA because the investment provisions of KOR-US FTA are basically modeled on the NAFTA Chapter 11. Finally, the Article will explore the concrete standard for determining an indirect expropriation articulated in KOR-US FTA, and analyze each considerable factor under customary international law. HISTORY OF INVESTMENT TREATIES AND EXPROPRIATION

Industrialized countries have long made efforts to achieve a global consensus about the principle that foreign investments cannot be nationalized without appropriate compensation. Particularly, the United State has strongly endorsed the “Hull Formula,” which requires a state to provide “prompt, adequate, and effective” compensation for the expropriation of foreign investments. 1However, continuous attempts to incorporate the Hull Formula into multilateral 1 See Andreas F. Lowenfeld, International Economic Law, 397-402 (2002). treaty were frustrated because the “Calvo Doctrine” gained widespread acceptance among developing countries.

2 This doctrine emphasized a sovereign state’s freedom from interference by other states, thereby providing developing countries with legal justification for noncompensable expropriation of foreign investments. 3 Failures to establish the multilateral treaty for protection of foreign investments led industrialized countries to consider protection of their investments through an alternative measure - BIT. Beginning in 1959, several European countries led by Germany began to negotiate BITs that incorporated protections against expropriation of foreign investments.

4 In the 1970s, the United States also adopted such an approach and launched its own BIT program aimed at protecting the foreign investments of United States corporations. 5 BITs have more proliferated since the collapse of the Soviet Union, and there are currently more than1500 BITs in force, involving 160 countries. 6 Virtually all of these agreements contain expropriation provisions, although only about half of them directly incorporate the language of the Hull Formula. 7 See Manuel R. G. Mora, The Calvo Clause in Latin American Constitutions and International Law, 206-07 (1950).

The Mexican Constitution’s Calvo Clause provides: “The State may grant the same right to foreigners [to acquire ownership of lands and other property], provided they agree... to consider themselves as nationals in respect to such property, and bind themselves not to invoke the protection of their governments in matters relating thereto under penalty, in case of noncompliance with the agreement, of forefeiture of the property acquired to the Nation. ” Constitucion Politica de los Estados Mexicanos (1917), ch. I, art. 27. 4 See Jeswald W.

Salacuse, BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign Investment in Developing Countries, 655-57 (1990). See Kenneth J. Vandevelde, The Bilateral Investment Treaty Program of the United States, 21 Cornell Int’l L. J. 201 (1998); see also M. S. Bergman, Bilateral Investment Protection Treaties: An Examination of the Evolution and Significance of the U. S. Prototype Treaty, 16 N. Y. U. J. Int’l Law & Pol’y 1 (1983). 6 See United Nations Conference on Trade and Development (UNCTAD), Bilateral Investment Treaties in the Mid1990s, at 8-10, U.

N. Doc. UNCTAD/ITE/IIT/7, U. N. Sales No. E98. II. D. 8 (1998). For an updated list of texts of bilateral treaties to which the United States is a party; see also U. S. Bilateral Investment Treaty Program, List of U. S. Bilateral Investment Treaties, http://www. state. gov/www/issues/economic/7treaty. html. 7 See Mohamed I. Khalil, Treatment of Foreign Investment in Bilateral Investment Treaties, ICSID Rev. –Foreign Inv. L. J. , 374-75 (1992). The expropriation provisions in the recent BITs went much further beyond protection guaranteed under Hull Formula.

Most of the current BITs require compensation not only for direct expropriation of property, but also for “indirect expropriation” – accomplished indirectly through measures equivalent to expropriation or nationalization. 8 Also, many of the recent BITs provide with foreign investors a separate dispute settlement measure through the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID). This settlement procedure has significantly relaxed procedural requirements that foreign investors have to comply with when they bring a claim in international or domestic courts.

Like other BITs, the expropriation provisions of KOR-US FTA should be interpreted in accordance with customary international law. There are myriad of international arbitration or court judgments on indirect expropriation claims arising from thousands of BITs, each of which can be a source of customary international law. However, such cases should be carefully used for interpretation purposes, because each BIT has its own distinct language as well as negotiating history and such differences may have affected the outcome of alleged indirect expropriation claims.

COMPARISON: NAFTA AND U. S. TAKING JURISPRUDENCE The NAFTA Chapter 11 jurisprudence will shed light on the determination of indirect expropriation claims arising from the investment provisions of KOR-US FTA. Despite some distinctions between the texts of these treaties, the investment provisions of KOR-US FTA are basically modeled on the text of the NAFTA Chapter 11. Also, a series of recent NAFTA Tribunal decisions have reflected well the modern approach to afford foreign investors a broad 8 See UNCTAD, supra note 6, at 33-34. protection.

Consequently, the NAFTA Chapter 11 jurisprudence will serve as one of the most reliable international law sources in future litigation arising from the investment provisions of KOR-US FTA. There is no serious doubt that United States jurisprudence under the Takings Clause of the Fifth Amendment has been one of the most influential sources in interpreting indirect expropriation claims arising from myriad of international investment treaties. However, contrary to the widespread belief that the NAFTA Tribunal has simply emulated the U.

S. Taking Clause jurisprudence, the Tribunal decisions and dicta goes well beyond protections guaranteed under the Takings Clause in several respects. First, the nascent interpretation of the recent NAFTA tribunal decisions suggests that the scope of property right to which the right of compensation applies under the NAFTA Chapter 11 is broader than that under the Taking Clause. The Takings Clause generally applies only to regulations of specific interests in property rights. In College Savings Bank v.

Florida Prepaid Postsecondary Education Expense Board, the Supreme Court rejected the idea that business opportunity can be recognized as property interest for purposes of the Taking Clause analysis, noting that “business in the sense of the activity of doing business, or the activity of making a profit is not property” and therefore is not entitled to the same constitutional protection. 9 Challenges to regulations of economic activity that do not affect a specific property interest, but instead only reduce the profitability of an economic enterprise, are entitled to review, if at all,