Fireman’s Fund Insurance Co. v. Mexico

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Citation. Int’l Centre for Settlement of Investment Disputes, ICSID Case No. ARB (AF)/02/1 Award, July 17, 2006.

Brief Fact Summary.

An arbitration against Mexico (D) for the expropriation of its property was sought by Fireman’s Fund Insurance Company (Fireman’s Fund) (P), a U.S. insurance company which owned debentures issued by a Mexican financial services company.

Synopsis of Rule of Law.

A taking (which includes destruction) that is permanent and either de jure or de facto, direct or indirect, in the form of a single measure or several measure over time, tangible or intangible property; a substantially complete deprivation of the economic use and enjoyment of the rights to the property; usually a transfer of ownership, but not always; as measured by the effect of the state’s measures, not the underlying intent; as possibly determined by the investor’s reasonable “investment-backed expectations”; and the compensability of which is determined by whether the measure is within the state’s recognized police powers, the public purpose and effect of the measure, the measure’s discriminatory nature, the proportionality between the means used and the goals intended to be realized, and the bona fide nature of the measure.
All the above are elements of expropriation of property under NAFTA.

Facts.

An arbitration was pursued against Mexico (D) by Fireman’s Fund Insurance Company (Fireman’s Fund) (P), a U.S. insurance company that owned debentures issued by a Mexican financial service company. Fireman Fund (P) alleged that Mexico (D) expropriated its property. The plaintiff also claimed that the defendant had aided in the purchase of debentures issued at the same time by the same company that were denominated in Mexican pesos and owned by Mexican investors, but turned its back to the purchase of the U.S. dollars owned by Fireman’s Fund (P). Though the tribunal did not  rule in favor of the plaintiff that Mexico (D) expropriated its property, it delineated the contours of what “expropriation” means.

Issue.

Can taking (which includes destruction) that is permanent and either de jure or de facto, direct or indirect, in the form of a single measure or several measure over time, tangible or intangible property; a substantially complete deprivation of the economic use and enjoyment of the rights to the property; usually a transfer of ownership, but not always; as measured by the effect of the state’s measures, not the underlying intent; as possibly determined by the investor’s reasonable “investment-backed expectations”; and the compensability of which is determined by whether the measure is within the state’s recognized police powers, the public purpose and effect of the measure, the measure’s discriminatory nature, the proportionality between the means used and the goals intended to be realized, and the bona fide nature of the measure, be classified as elements of expropriation of property under NAFTA?

Held.

(Judge not identified in casebook excerpt). Yes. A taking (which includes destruction) that is permanent and either de jure or de facto, direct or indirect, in the form of a single measure or several measure over time, tangible or intangible property; a substantially complete deprivation of the economic use and enjoyment of the rights to the property; usually a transfer of ownership, but not always; as measured by the effect of the state’s measures, not the underlying intent; as possibly determined by the investor’s reasonable “investment-backed expectations”; and the compensability of which is determined by whether the measure is within the state’s recognized police powers, the public purpose and effect of the measure, the measure’s discriminatory nature, the proportionality between the means used and the goals intended to be realized, and the bona fide nature of the measure.
All the above are elements of expropriation of property under NAFTA.
NAFTA does not have a specific definition ascribed to “expropriation”. The definitions of expropriation have continually changed in more than ten cases in which Article 1110(1) of NAFTA has been considered. The present Tribunal however retains the following elements when considering those cases and customary international law;
(a)    Expropriation requires a taking (which may include destruction) by a government-type authority of an investment by an investor covered by NAFTA.
(b)    Intangible and tangible property may be covered by the investment.
(c)    The taking must be a substantially complete deprivation of the economic use and enjoyment of the rights to the property, or of the identifiable distinct parts thereof (i.e, it approaches total impairment)
(d)    The taking must not be ephemeral or temporary, but it must be permanent.
(e)    Transfer of ownership to another person is typical of  a taking (frequently the government concerned), but in certain cases, this might not be so (eg, total destruction of an investment due to measures by a government authority without transfer of right)
(f)    For the determination of whether there is expropriation, the effects of the host state’s measures are dispositive and not the underlying intent.
(g)    The taking might either be de facto or de jure
(h)    It may also be indirect or direct.
(i)    The taking may take the form of a series of related or unrelated measures over a period of time (the so-called “creeping “expropriation). It may also take the form of a single measure.
(j)    The following factors may be taken into consideration when distinguishing a compensable expropriation and a non-compensable regulation by a host state; whether the measure is within the recognized police powers of the host state; the effect (public) and purpose of the measure; whether the measure is discriminatory; the proportionality between the aim sought to be realized and the means employed; and the bona fide nature of the measure.
(k)    To determine the occurrence of expropriation, the investor’s reasonable “investment-backed expectations” may be a relevant factor.

Discussion.

For compensation taking by a state of a foreign national’s property to be just as stipulated in the Restatement (Third) of Foreign Relations Law of the United states, it must in the absence of exceptional circumstances, be in an amount equal to the value of the taken property and be paid at the time of the taking, or within a reasonable time thereafter with interest from the date of taking, and in a form economically usable by the foreign national whose property has been taken.