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2. EXPROPRIATION AND COMPENSATION

1. The terms "public purpose" and "public interest" derive from different legal traditions but have

very similar meanings. The term chosen "for a purpose which is in the public interest" is considered

consistent with both legal traditions; it was previously agreed in the Energy Charter Treaty (ECT).

2. The Drafting Group understands that the violation of criminal laws could result in the loss of an

investment (or part thereof) which would not be deemed expropriation, provided those laws and their

application are non-discriminatory and otherwise consistent with the standards of this agreement.

3. In cases where the investment consists in total or in part of shares, the rights of the shareholders,

if an expropriation takes place, have to be defined. This should derive from the definition of investments

in the MAI, if not, a special provision may be needed in Article 2.

4. Expropriation in cases where the investment consists in total or in part of intellectual property

rights was seen as critical. It was decided not to suggest specific language on this issue and that it would

need to be further revisited in a global context.

5. "Creeping expropriation" in general is covered by the words of Article 2: "measures or measures

having equivalent effect". "Creeping expropriation" through tax measures were mentioned but no specific

wording was suggested (see Commentary on "Taxation").

6. Austria proposed additional text on blocking, freezing, sequestration or any similar measures

having expropriatory effect [DAFFE/MAI/DGI/RD(95)4]. After discussion, it was agreed that these

concerns were already addressed: temporary actions, when ended, would result in restitution of the

property, and, any unlawful aspects of the temporary measure could give rise to damages for breach of

other articles, such as Article 1. Should the measures take on a permanent or expropriatory character, they

would, (i) if lawful, be subject to Article 2, or (ii) if unlawful, give rise to a right to restitution under

customary international law.

7. The Drafting Group considered the problem of exchange rate risk only in the case of delay in the

payment of compensation for expropriation to the exclusion of other exchange rate risks to which the

investor may be exposed.

8. It identified four options for calculating compensation in order to protect the investor against

losses from currency fluctuations before date of payment. In each case, the text would replace the text

currently shown in article 2.5.

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Option A - Investor's Choice

The compensation to be paid shall be calculated by summing:

(a) the fair market value of the expropriated investment on the date of expropriation,

expressed, at the option of the investor on the date of expropriation, in either:

(i) the currency of the host state;

(ii) the currency of the investor's home state;

(iii) a freely usable currency; or

(iv) any other currency acceptable to the host government

at the market rate of exchange prevailing on that date, plus

(b) interest, at a commercial rate established on a market basis for the currency of

valuation, from the date of expropriation until the date of actual payment.

That sum shall be expressed in the currency of payment at the market rate of exchange

prevailing on the date of payment for the currency of valuation.

Option B - Government Choice: Multiple currency option

The compensation to be paid shall be calculated by summing:

(a)the fair market value of the expropriated investment on the date of expropriation,

expressed, at the option of the host government on the date of expropriation, in either:

(i) a freely usable currency,

(ii) the ECU, or

(iii) any other currency acceptable to the investor

at the market rate of exchange prevailing on that date, plus

(b) interest, at a commercial rate established on a market basis for the currency of

valuation, from the date of expropriation until the date of actual payment.

That sum shall be expressed in the currency of payment at the market rate of exchange

prevailing on the date of payment for the currency of valuation.

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Option C - Government Choice - Freelv Convertible Currency specially defined⁽¹⁾

The compensation to be paid shall be calculated by summing:

(a)the fair market value of the expropriated investment on the date of expropriation

expressed in a-Freely Convertible Currency chosen by the host government on the date of

expropriation at the market rate of exchange prevailing on that date, plus....

(b) interest, at a commercial rate established on a market basis for the currency of

valuation, from the date of expropriation until the date of actual payment.

That sum shall be expressed in the currency of payment at the market rate of exchange

prevailing on the date of payment for the currency of valuation.

The following would be inserted in the definitions article: 'A Freely Convertible Currency

is a currency which is, in fact, widely used to make payments for international transactions

and is widely traded in the principal exchange markets".

Option D - No Explicit Coverage of Exchange Loss Provision

Compensation shall include interest at a commercially reasonable rate established on a

market basis for the currency of payment from the date of expropriation until the date of

actual payment.

9. A majority of delegations favoured Option D. Some delegations considered that the international

law standard of compensation, set out in Article 2, which requires payment of full market value in fully

realisable form and without delay, has implicit within it the requirement of offsetting declines in the

currency of valuation between the valuation date and the payment, where there was a delay. Others

considered this approach to be too vague or to leave the issue open for later dispute. They therefore

favoured an explicit provision on the method to be used in calculating expropriation compensation

including the choice of reference currency.

10. A number of delegations favoured giving the investor a choice of currency. Some favoured

limiting the choice to the currencies of the home or host government. Others favoured broadening that

choice somewhat. There was a consensus among them that the choice could not be unlimited. Option A

illustrates their approach.

11. A number of other delegations considered that the choice of currency should be with the host

government. Several of those delegations supported Option C. One delegation preferred Option B and

requested its inclusion in this report.

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12. One delegation noted that it could only accept an option which did not allow its currency to be

used for calculation if the same limitation were imposed on all MAI parties. It suggested the inclusion of

the words "other than its own" after the words "a freely usable currency" in Option B. The same delegation

mentioned that another option would be to calculate exchange rate changes on the basis of a basket of

currencies.

13. It will need to be borne in mind, when considering the accession of non-OECD Members, that

the convertibility of the national currency will be important with respect to the transfer obligations of the

agreement, including transfers of compensation for expropriation.

14. The Austrian delegation asked whether the drafting of Article 2 was adequate to avoid excessive

scope, raising as an example the case of an investor which had received a permit or authorization for an

investment but then ceased to meet the necessary conditions for it. The Drafting Group was of the opinion

that this should pose no problem under Article 2 as drafted: cancellation or withdrawal of the permit or

authorization in these circumstances by the Government would not constitute a direct or indirect

expropriation or nationalization of the investment. Comment 2 to Article 2, on loss of an investment

through proper application of criminal laws, was not exhaustive.

15. The Mexican delegation, supported by the United States delegation, believes it is important to

provide guidance to arbitrators on how to determine the "fair market value". This paragraph could read as

follows:

"Valuation criteria shall include going concern value, asset value including declared tax value of

tangible property, and other criteria, as appropriate, to determine the fair market value.

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4. Transfers

1. All delegations agreed that the free transfer of returns was a critical element of the protection of

the investors. Therefore a clear preference was voiced for listing the main categories of returns in Article

4.1(b) and in particular: "profits, interest. dividends, capital gains, royalties, fees and return in kind".

However it was finally agreed not to lengthen the text of Article 4.1(b) provided that these categories are

explicitly listed in the definition of returns in the article on definitions of the MAI.

2. The free transfer obligation applies to earnings and other remuneration net after deduction of any

withholding for tax or social security purposes. Dispute resolution would be available to investors but not

their personnel.

3. The Drafting Group heard a presentation on transfers by an expert from the International

Monetary Fund regarding the rights and obligations of countries under the Fund Agreement. It

recommended that the Negotiating Group deal with this matter, for example, under general provisions

concerning the relationship of the MAI to other international agreements.

4. The Negotiating Group will nevertheless need to address the question of general exceptions and

temporary derogations for reasons such as balance of payments, public order and preservation of monetary

union, including their possible relation to this article. However, it was mentioned that any such provision

should not apply to payment of compensation under Article 2.

5. Articles 4.2 and 4.3 ensure -- without imposing it -- the freedom to make transfers in a freely

[convertible] currency at a market rate. The reference to the exchange rate in Article 4.3 pertains only to

cases where the conversion of funds occurs on the date of transfer.

6. Most delegations considered that the draft Article 4.4 would provide greater investor protection

in extreme circumstances. Others thought the provision should not rule out a different solution mutually

agreed by the Parties.

7. Conversely, a few delegations considered that it would not be useful or necessary to include such

a text because: a) the extreme circumstances envisaged were very unlikely to arise in OECD countries; b)

it is unlikely that a country without a functioning foreign exchange market would want to join or be able

to meet the criteria for joining the MAI; and c) if a provision were included for these cases, the SDR rate

may not be the most appropriate or most advantageous rate for the investor.

8. It was broadly agreed that this specific matter was independent of the general issues linked to the

accession of non-Members to the MAI, although the conditions of non-Member accession to the MAI

could possibly include a requirement that all MAI countries should meet the requirements of Article VIII

of the IMF Agreement and should maintain functioning foreign exchange markets.

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9. In order to emphasise the freedom of transfer. Japan proposed the following text for the first

sentence of Article 4 5: ''The freedom of transfer of returns in kind under Article 4.1(b) does not derogate

from the rights of a Contracting Party under the Agreement established by the World Trade Organisation

to restrict or prohibit the export or the sale for export of what constitutes the return in kind".

10. Article 4.6 is indirectly but closely linked with the issue of free transfer. It allows satisfaction of

two important objectives. It is comparable to the language in the Energy Charter Treaty (ECT). Some

delegations would include additional specific objectives, such as bankruptcy, insolvency or the protection

of the rights of creditors; issuing. trading or dealing in securities; and records of transfers. Other

delegations questioned the need and desirability of Article 4.6.

11. At the invitation of the Negotiating Group, EG5 reviewed earlier square-bracketed text for

paragraph 4.6 of the MAI Article on Transfers. This present text has been developed by EG5 for the MAI

Article on Transfers as a whole. Most delegations considered that such provisions are particularly

important for financial services. A few delegations felt that no such provisions are necessary.

12. One delegation suggested adding the following text on forced transfers: "A Contracting Party

shall not require the transfer of, or penalise the failure to transfer. the income, earnings, profits or other

amounts derived from, or attributable to, an investment in the territory of another Contracting Party by one

of its investors." This proposal did not attract a consensus.

5. SUBROGATION

1. It was discussed whether to include reference to private insurance companies in the recognition

given in Article 5. A special provision to this effect was considered unnecessary since a Contracting Party

may designate its "designated agency" regardless of its private or public status.

2. The respective rights of the investor and the Contracting Party or its designated agency

subrogated in the rights of this investor and dealt with in the text on Dispute Settlement.

6. PROTECTING EXISTING INVESTMENTS

1. There was broad support for inclusion in the MAI of a provision stipulating that the MAI would

apply to pre-MAI investments. The debate was not conclusive as to whether to restrict the coverage to

investments that were "consistent with the legislation" of the host state.

2. Some delegations wish to specify that the Agreement would not apply to claims arising out of

past events or which had already been settled. This is reflected in Option A in the draft text. Another

delegation questioned the need for the second sentence in view of Article 28 of the Vienna Convention on

the Law of Treaties and proposed the text in Option B. which avoids implying retroactive effect.

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1. The definition of "Freely Convertible Currency" would need to be the same as that adopted for the "Transfers" provision (article 4.2).