Another cause for direct expropriation is the concept that the State will in some way gain financially, socially, or economically from the expropriate assets beyond their value of compensation. If a particular investment can generate more positive results in the hands of the State, it is legal to file expropriation proceedings if the full value of compensation is covered as determine by an international tribunal.
In the European Union, direct expropriations are most common. Based on a common peace and favorable diplomatic relations between the countries within the European Union, there is little need for many investors to worry about unlawful and forceful expropriation, as seen in developing or communist nations. Some investors may invest within a host nation without special regulations regarding the fate of the property in the event of an expropriation or nationalization dispute. However, in more developed nations, many foreign investors are confident in the stability of the host country to not have to demand special restrictions and regulations, (Ripinksy & Williams 2008). Direct expropriation is more based on the needs of the State and generally stipulates the need for proper compensation on behalf of the State. Therefore, within the European Union, which is more developed and less of a risk for nationalization, direct expropriations are much more common than the trickier indirect expropriations.
However, in developing countries, direct expropriation can still be as tricky as indirect expropriations. There is more of a risk for foreign investors, and so many stipulate standards in investment agreements which guarantee some protection of the foreign investor's assets. It is these protections which will eventually help secure compensation for foreign investors in international tribunals. Without such stipulations, direct expropriation may come ungrounded within the context of international investment laws, and therefore result in potential years of trials and hearings to clear the matter and properly compensate the foreign investor for the lost asset.
Indirect Expropriation
Unlike direct expropriation, indirect expropriation is much harder to deal with when disputes between the investor and State arise. Because of the nature of indirect expropriation, it tends to be much more debatable between both parties, State and investor. Indirect expropriation has been used "to create a seemingly stronger presumption in favor of state public welfare regulations than previous cases," (Edsall 2007:934). States use indirect expropriation to promote social welfare and protect their sovereignty from invading foreign exploiters. It was the right given to States to exercise their sovereignty within their own borders, yet has also lead to great damages incurred by foreign investors who have been wrongly expropriated from various States. The move to indirectly expropriate a foreign investor may in fact actually "deprive the owner, in whole or in significant part, of the use or reasonably-to-be expected economic benefit of property," (Edsall 2007:937). Indirect expropriation is executed by States in order for their own public good. In the modern context, "There are very few cases of indirect expropriation at the international level because under customary international law, a state is not responsible for loss of property or other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture from crime, or other action of the kind," (SICE: 1). This leaves the resolution of indirect expropriation cases harder to work out, with much more risks involved on behalf of the foreign investor who lost assets or property in a particular State. However, a State may also ultimately decide to use an indirect expropriation in the event of a breach of contract on behalf of the investor. Although not typical in international cases, if this breach of contract has in some way placed the good of the people in the host State in jeopardy, that State is allowed the right to commence expropriation. In international law, "it is generally accepted that an indirect expropriation may occur in the form of a material breach or cancellation of a contract," (Weiler 2005:296). Therefore, the State may exercise its right to take back property and assets under a contract breach.
In the European Union, indirect expropriation is normally limited to European countries and their dealings with developing nations. Typically, measures leading up to an indirect expropriation, especially in cases of a breach of contract, are handled locally by domestic courts in the European Union. Since there is much more stability in this region than in other areas of developing nations, there is little worry of investors about the State taking their assets for the nature of the public good (Hober 2007). However, European companies...
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