Compensation for Expropriation

The report examines the divergence between lawful and wrongful expropriation compensation, the challenges of indirect expropriation, and the various valuation methods used by arbitral tribunals, such as market value and discounted cash flow.

• Customary international law distinguishes between compensation for lawful and wrongful expropriations. For lawful expropriation, compensation is generally limited to the value of the company at the time of dispossession plus interest. In contrast, wrongful expropriation requires reparation that aims to "wipe out all the consequences of the illegal act," which may include both losses (damnum emergens) and lost profits (lucrum cessans).
• Bilateral Investment Treaties (BITs) often fail to distinguish between direct and indirect expropriation in their compensation clauses. This creates a risk where legitimate public interest regulations—such as health or environmental laws—could be classified as indirect expropriation, forcing States to pay full compensation despite receiving no financial gain from the measure.
• There is a lack of clarity in BITs regarding whether the same compensation standard applies to both lawful and wrongful acts. In practice, some tribunals have shifted from using the legality of the act to using the profitability of the assets as the primary criterion for determining the quantum of compensation.
• The obligation to pay interest is recognized as customary international law, but the lack of specific guidance in BITs leads to unpredictable calculations. Tribunals may use the cost of the investor's loss of opportunity, borrowing costs, or market-based indices like LIBOR, and often apply compound interest, which can result in interest payments exceeding the principal amount.
• The 'Hull formula' of "prompt, adequate and effective" compensation is a common BIT standard, often interpreted as requiring full compensation based on fair market value. However, the SADC Model BIT proposes a "fair and adequate" standard that allows for a balance between public interest and investor interests, considering factors like the history of acquisition and past profits.
• Arbitral tribunals primarily use three valuation methods: the Market Value Method, which is prone to speculation and requires a comparable market; the Net Book Value Method, which is more objective but ignores future profit potential and is typically used for non-profitable assets; and the Net Present Value of Discounted Future Cash Flow Method, which is widely used for performing assets but is criticized as being inherently speculative.

APA

Nikièma, S. H. (2013). Compensation for Expropriation. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/best_practice_compensation_expropriation_en.pdf

Chicago

Nikièma, Suzy H. Compensation for Expropriation. International Institute for Sustainable Development, 2013. https://www.iisd.org/system/files/publications/best_practice_compensation_expropriation_en.pdf.

Wikipedia

{{cite report |last1=Nikièma |first1=Suzy H. |title=Compensation for Expropriation |publisher=International Institute for Sustainable Development |date=March 2013 |url=https://www.iisd.org/system/files/publications/best_practice_compensation_expropriation_en.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{nikima2013compensation, author = {Nikièma, Suzy H.}, title = {{Compensation for Expropriation}}, institution = {International Institute for Sustainable Development}, year = {2013}, month = mar, url = {https://www.iisd.org/system/files/publications/best_practice_compensation_expropriation_en.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }