WORLD TRADE
ORGANIZATIONWT/WGTI/W/91
11 October 2000
(00-4167)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM KOREA
The following communication, dated 10 October 2000, has been received from the Permanent
Mission of the Republic of Korea.
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Investment Protection: Expropriation and Compensation
I. INTRODUCTION
1. A comprehensive international investment agreement has two pillars, investment
liberalization and investment protection, which ar e supported by dispute resolution procedures.
Investment protection is generally provided by three core clauses covering expropriation and
compensation, transfer, and protection from strife.  The clause on expropriation and compensation is
the most traditional core provision in the history of  international investment agreements.  The purpose
of overall investment protection clauses is to protect the property ownership of the foreign investors,
while the clause on expropriation and compensation aims to maximize protection of the investor’s
property rights from expropriation or nationalization measures by the host country.
2. Compared to its importance, the clause on expropriation and compensation is relatively little
understood.  The increase in the number of disputes suggests that the expropriation and compensationclause can be interpreted with a broader meaning than was originally expected, leading to substantial
ambiguities.  Furthermore, problems of the clause are frequently addressed by criticisms of
international investment agreements by representatives of the civil society, e.g., NGOs (non-
government organizations).  However, an in-depth discussion of the clause has not yet been conducted
among investment experts at  international fora. In an attempt to shed more light on this issue, this
paper aims to promote a mutual understanding among the WTO member countries regarding the
meaning of the expropriation and compensation clause.
II. CONTENTS OF THE EXPROPRIATION CLAUSE
A. D
EFINITION OF EXPROPRIATION
3. International investment agreements apply expropriation provisions to both direct and indirect
expropriation or nationalization measures.1  Specifications placing indirect expropriation measures
under the category of expropriation take different formulations referring frequently to phrases such as:
                                                     
1 Expropriation is understood as a measure that transfers an individual’s property right or other rights
on a specific object to the ownership of the government or a third party for public interest. Whereasexpropriation deals with each case, nationalization is generally a measure applied partially or wholly to the
economy. Expropriation is executed through administrative order, while nationalization is on a national policy
level.WT/WGTI/W/91
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“measures having effect equivalent to expropriation and nationalization” and “any other measures, the
effects of which would be tantamount to expropriation or nationalization.”
B. CONDITIONS OF EXPROPRIATION
4. The four definitive conditions of expropriation state that expropriation should be (1) for a
public purpose;  (2) in a non-discriminatory manner;  (3) in accordance with due process of law;  and(4) under payment of compensation.
C. C
OMPENSATION
5. Generally, international investment agreements accept standards of compensation similar to
those adopted in Hull’s formula, which states compensations must be “prompt, adequate, and
effective.”
III. INDIRECT EXPROPRIATION
6. Currently, the biggest problem is definitional in nature, since there has yet to be a widely
accepted standing definition of “indirect expropriation” or “creeping expropriation”.  This problem is
behind many international disputes.  Although there is no standing definition of indirect expropriation,
it is generally understood as measures that substantially impair the value of an investment without
affecting any property rights linked to this investment.  Compulsory sale of all or part of the
investment, compulsory disposal of shares, for ced localization, interference in property rights,
dismissal of license or certification required in corporate activities, excessive imposition of taxes,
unlawful deportation, freezing of bank assets, encouraging strikes and other threatening measures are
often regarded as indirect expropriation.2
7. The MAI (Multilateral Agreement on Investment) negotiation fuelled new interest in the
interpretation of the clause, which was previously accepted as a matter of course.  The most hotlydebated topic in the MAI negotiation was the issue of  “regulatory taking.”  The question was whether
“regulatory taking (i.e., government policy measures which inflict damage on investment asset value
of a foreign investors)” should be considered as a kind of expropriation.  If so, the host country would
be obligated to compensate.
8. This question was raised by NGOs in accordance with the well-known NAFTA dispute cases
and led to controversy which, in turn, fed the growing opposition to the MAI.  Unfortunately, the
failure of the MAI negotiation prevented this important question from being discussed in-depth at the
negotiating table and this, despite mutual agreement among the MAI negotiators on the necessity of a
more precise concept of expropriation.
IV. TOWARDS A MULTILATERAL FRAMEWORK ON INVESTMENT
9. The expropriation clause can be seen as the provision that lacks the most mutual
understanding among countries.  Although the clause is common to all BITs, a mutual understandingof the clause in light of international investment agreements is crucial.  The following three questions
could be raised for further discussions on the expropriation clause.
(a) When governments engage in BIT, what is the usual kind of expropriations are they
willing to provide compensation for?
                                                     
2 Sornarajah, M., The International Law on Foreign Investment , 1994.WT/WGTI/W/91
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(b) How strongly do foreign investors feel their investment is being protected in the host
country by the expropriation clause?
(c) For NGOs, what is the acceptable nature and range of expropriations that should be
compensated?
10. The development of a framework mutually agreed upon by the host and home countries,
foreign investors and NGOs is essential to creating a transparent and predictable environment for
international investments.  Korea believes that this cannot be constructively undertaken through
multiple networks of BITs as they apply a plethora of different definitions, standards and conditions.
Appendix A: Expropriation Provision of the Bilateral Investment Agreement between Korea
and Country A
Article 5. Nationalization or Expropriation
1. Investments of nationals or companies of either Contracting Party shall not be nationalized,
expropriated or subjected to measures having effect equivalent to nationalization or expropriation
(hereinafter referred to as "expropriation") in the territory of the other Contracting Party except for a
public purpose related to the internal needs of that Party and against prompt, adequate and effectivecompensation provided that such measures are taken on a non-discriminatory basis and in accordance
with its laws.
2. Such compensation shall amount to the market value of the investment expropriated
immediately before the expropriation or impending expropriation became public knowledge, shall
include interest until the date of payment, at a prevailing commercial rate, and shall be made withoutdelay, be effectively realizable and be freely transferable.  The national or company affected shall
have a right, under the law of the Contracting Party making the expropriation, to prompt review, by a
judicial or other independent authority of that Contracting Party, of his or its case and of the valuation
of his or its investment in accordance with the principles set out in this paragraph.
3. Where one Contracting Party expropriates the assets of a company which is incorporated or
constituted under the law in force in any part of its own territory, and in which nationals or companies
of the other Contracting Party own shares or debentures, it shall ensure that the provisions of
paragraph (1) and (2) of this Article are applied to the extent necessary to guarantee prompt, adequate
and effective compensation in respect of their invest ment to such nationals or companies of the other
Contracting Party who are owners of those shares or debentures.
Appendix B: Expropriation Provision of NAFTAArticle 1110: Expropriation and Compensation
1. No Party shall directly or indirectly nationalise or expropriate an investment of an investor of
another Party in its territory or take a measure tantamount to nationalization or expropriation of such
an investment ("expropriation"), except:
(a) for a public purpose;
(b) on a non-discriminatory basis;
(c) in accordance with due process of law and the general principles of treatment
provided in Article 1105; andWT/WGTI/W/91
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(d) upon payment of compensation in accordance with paragraphs 2 to 6.
2. Compensation shall be equivalent to the fair market value of the expropriated investment
immediately before the expropriation took place ("date of expropriation"), and shall not reflect any
change in value occurring because the intended expropriation had become known earlier.  Valuation
criteria shall include going concern value, asset value (including declared tax value of tangibleproperty) and other criteria, as appropriate to determine fair market value.
3. Compensation shall be paid without delay and be fully realizable.
4. If payment is made in a G7 currency, compen sation shall include interest at a commercially
reasonable rate for that currency from the date of expropriation until the date of actual payment
thereof.
5. If a Party elects to pay in a currency other than a G7 currency, the amount paid on the date of
payment, if converted into a G7 currency at the market rate of exchange prevailing on that date, shallbe no less than if the amount of compensation owed on the date of expropriation had been converted
into that G7 currency at the market rate of exchange prevailing on that date, and interest had accrued
at a commercially reasonable rate for that G7 currency from the date of expropriation until the date of
payment.
6. Upon payment, compensation shall be freely transferable as provided in Article 1109.
7. This Article does not apply to the issuance of compulsory licenses granted in relation to
intellectual property rights, or the revocation, limitation or creation of intellectual property rights to
the extent that such issuance, revocation, limitation or creation is consistent with Chapter Seventeen
(Intellectual Property).
8. For purposes of this Article and for greater clarity, a non-discriminatory measure of general
application shall not be considered a measure tantamount to an expropriation of a debt security or loan
covered by this Chapter solely on the ground that the measure imposes costs on the debtor that cause
it to default on the debt.
Appendix C: Expropriation Provision of the World Bank Guidelines on the Treatment of
Foreign Direct Investment
IV
EXPROPRIATION AND UNILATERAL ALTERATIONS OR TERMINATION OF
CONTRACTS
1. A State may not expropriate or otherwise ta ke on whole or in part a foreign private
investment in its territory, or take measures which have similar effects, except where this is done in
accordance with applicable legal procedures, in pursuance in good faith of a public purpose, withoutdiscrimination on the basis of nationality and against the payment of appropriate compensation.
2. Compensation for a specific investment taken by the State will, according to the details
provided below, be deemed “appropriate” if it is adequate, effective and prompt.
3. Compensation will be deemed “adequate” if it is based on the fair market value of the taken
asset as such value is determined immediately befo re the time at which the taking occurred or the
decision to take the asset become publicly known.WT/WGTI/W/91
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4. Determination of the “fair market value” will be acceptable if conducted according to a
method agreed by the State and the foreign investor (hereinafter referred to as the parties) or by a
tribunal or another body designated by the parties.
5. In the absence of a determination agreed by, or based on the agreement of, the parties, the fair
market value will be acceptable if determined by the State according to reasonable criteria related tothe market value of the investment, i.e., in an amount that a willing buyer would normally pay to a
willing seller after taking into account the nature  of the investment, the circumstances in which it
would operate in the future and its specific characte ristics, including the period in which it has been in
existence, the proportion of tangible assets in the total investment and other relevant factors pertinent
to the specific circumstances of each case.
6. Without implying the exclusive validity of a single standard for the fairness by which
compensation if to by determined and as an illustration of the reasonable determination by a State ofthe market value of the investment under Section 5 above, such determination will be deemed
reasonable if conducted as follows:
(a) for a going concern with a proven record of profitability, on the bases of the
discounted cash flow value:
(b) for an enterprise which, not being a proven going concern, demonstrates lack of
profitability, on the basis of the liquidation value;
(c) for other assets, on the bases of (i) the replacement value or (ii) the book value in case
such value has been recently assessed or has been determined as of the date of the
taking and can therefore be deemed to represent a reasonable replacement value.
For the purpose of this provision:
− a “going concern ” means an enterprise consisting of income-producing assets which has been
in operation for a sufficient period of time to generate the data required for the calculation of
future income and which could have been expected with reasonable certainty, if the taking
had not occurred, to continue producing legitimate income over the course of its economic
life in the general circumstances following the taking by the State;
− “discounted cash flow value ” means the cash receipts realistically expected from the
enterprise in each future year of its economic life as reasonably projected minus that year’sexpected cash expenditure, after discounting this net cash flow for each year by a factor
which reflects the time value of money, expected inflation, and the risk associated with such
cash flow under realistic circumstances. Such discount rate may be measured by examining
the rate of return available in the same market on alternative investments of comparable riskon the basis of their present value;
− “liquidation value ” means the amounts at which individual assets comprising the enterprise or
the entire assets of the enterprise could be sold under conditions of liquidation to a willing
buyer less any liabilities which the enterprise has to meet;
− “replacement value ” means the cash amount required to replace the individual assets of the
enterprise in their actual state as of the date of the taking; and
− “book value ” means the difference between the enterprise’s assets and liabilities as recorded
on its financial statements or the amount at which the taken tangible assets appear on the
balance sheet of the enterprise, representing their cost after deducting accepted by the
International Monetary Fund or in any other currency accepted by the investor.WT/WGTI/W/91
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7. Compensation will be deemed “effective” if it is paid in the currency brought in by the
investor where it remains convertible, in another currency designated as freely usable by the
International Monetary Fund or in any other currency accepted by the investor.
8. Compensation will be deemed to be “prompt” in normal circumstances if paid without delay.
In cases where the State faces exceptional circumstances, as reflected in an arrangement for the use ofthe resources or the International Monetary Fund or under similar objective circumstances of
established foreign exchange stringencies, compensation in the currency designated under Section 7
above may be paid in instalments within a period wh ich will be as short as possible and which will not
in any case exceed five years from the time of the taking, provided that reasonable, market-related
interest applies to the deferred payments in the same currency.
9. Compensation according to the above criteria will not be due, or will be reduced in case the
investment is taken by the State as a sanction against an investor who has violated the State’s law andregulations which have been in force prior to the taking, as such violation if compensation in such a
case will be settled in accordance with the provisions of Guideline V.
10. In case of comprehensive non-discriminatory nationalizations effected in the process of large
scale social reforms under exceptional circumstances of revolution, war and similar exigencies, the
compensation may be determined through negotiations between the host State and the investors’ homeState and failing this, through international arbitration.
11. The provisions of Section 1 of this Guideline will apply with respect to the conditions under
which a State may unilaterally terminate, amend or otherwise disclaim liability under a contract with a
foreign private investor for other than commercial reasons, i.e., where the State acts as a sovereign
and not as a contraction party.  Compensation due to investor in such cases will be determined in thelight of the provisions of Sections 2 to 9 of this Guideline.  Liability for repudiation of contract for
commercial reasons, i.e., where the State acts as a contracting party, will be determined under the
applicable law of the contract.
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