Compensation for Expropriation

This report by the International Institute for Sustainable Development (IISD) analyzes the legal principles and methods used to determine compensation for the expropriation of foreign investments. It examines the tension between customary international law and Bilateral Investment Treaties (BITs), highlighting how vague treaty language often leaves the calculation of compensation to the discretion of arbitral tribunals and accounting firms. The document provides recommendations for States to draft more precise BIT clauses to protect public funds and maintain regulatory space for public interest legislation.

• Customary international law distinguishes between compensation for lawful and wrongful expropriation. For lawful expropriation, compensation is generally limited to the value of the company at the time of dispossession plus interest. In contrast, wrongful expropriation entitles the investor to 'reparation,' which aims to 'wipe out all the consequences of the illegal act' and 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 even though the State did not acquire an economic gain from the measure.
• There is a significant lack of clarity in BITs regarding the timing and nature of interest payments. While many treaties require 'prompt' payment and interest at 'normal commercial rates,' they often omit whether interest should be simple or compound. This ambiguity can lead to situations where compound interest, applied over many years, exceeds the original principal amount of the compensation.
• The 'Hull formula' of 'prompt, adequate and effective' compensation is a common BIT standard, often interpreted by tribunals as requiring full compensation equivalent to the fair market value of the investment. However, the SADC Model BIT proposes a 'fair and adequate' standard that allows for a balance between public interest and investor interests, considering factors such as the history of acquisition and past profits.
• Arbitral tribunals primarily use three methods to value expropriated investments: the Market Value Method (based on hypothetical buyer/seller prices), the Net Book Value Method (based on historical assets minus depreciation), and the Net Present Value of Discounted Future Cash Flow Method (estimating future revenues adjusted for risk). The report notes that the latter two are often used for non-profitable assets, while the Market Value and Discounted Cash Flow methods are prone to speculation.
• The report recommends that States explicitly define what does not constitute indirect expropriation in their BITs to protect their regulatory autonomy. Additionally, it suggests that treaties should specify the distinction between lawful and wrongful expropriation standards, clarify interest accrual and capitalization, and introduce flexible payment schedules for burdensome awards.

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} }