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Coercion and Foreign Investment Rearrangements

Published online by Cambridge University Press:  27 February 2017

Detlev F. Vagts
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Extract

Expropriations in the later 1970’s often proceed more suavely than in the past. Straightforward seizure, to be sure, still has devotees. However, an increasingly favored approach is to induce the foreign investor to convey his property (or an interest therein) by an instrument that on its face represents an ordinary sale. That sale may be accompanied by a revision of the terms of some underlying contract between the investor and the government. The purpose of this article is to explore whether any body of rules now exists setting limits to the means that a government can use to obtain the investor’s consent. It then asks whether that law could be further developed so as to improve the quality of such negotiations and to cause them to produce more equitable results. Thereby it would indirectly improve the security and efficiency of the whole process of foreign direct investment.

Type
Research Article
Information
American Journal of International Law , Volume 72 , Issue 1 , January 1978 , pp. 17 - 36
Copyright
Copyright © American Society of International Law 1978

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References

1 This subject matter has been considered previously in Weston, , 0022 Constructive Takings 0022 under International Law, 16 Va. J. Int. L. 103, 133–48 (1975)Google Scholar; Christie, , What Constitutes a Taking of Property under International Law, 38 Brit. Y.B. Int. L. 307, 324–29 (1962)Google Scholar; Wortley, B., Expropriation in Public International Law 1–2 (1959)Google Scholar. Weston (at 148) concludes that involuntary sales should be regarded as 0022functional equivalents0022 of simple deprivations but that they should entail only compensation to the extent of the deficiency between the price paid and the price 0022objectively deserved.0022 Sales in violation of basic human rights should be void. He is critical of Christie0027s requirements before compensation should be granted: only if there are physical threats or if there is a flat statement no compensation will be paid and even then only if the price is obviously inadequate.

2 The Anaconda arbitral award is reported at 14 ILM 1210 (1975). It should be noted that the author of this article was a member of that panel. The dispute was ultimately resolved by a settlement. N.Y. Times, April 1, 1977, at Dl, col. 4.

3 These episodes are reported in Steiner, H. & Vagts, D., Transnational Legal Problems 440–43 (2d ed. 1976)Google Scholar.

4 A translation of the Venezuelan law appears at 14 ILM 1492 (1975). Other recent oil nationalizations by agreement that might, if all the facts were known, involve “duress”; have taken place in Ecuador (N.Y. Times, Aug. 8, 1973, at 47, col. 2); in Kuwait (N.Y. Times, Dec. 2, 1975, at 52, col. 5; id. Dec. 22, 1975, at 47, col. 3); and, though not yet completed, in Saudi Arabia (N.Y. Times, March 13, 1976, at 31, col. 1; id., May 20, 1977, at Dl, col. 4).

5 The Hickenlooper Amendment, 22 U.S.C. §2370(e)(1), speaks of “actions, which have the effect of nationalizing, expropriating or otherwise seizing ownership or control,”; which may cover duress transactions. Similar language appeared in the Sugar Act, 7 U.S.C. 00A71158(c); in the trade preference portion of the 1974 Trade Act, 19 U.S.C. §2462(b)(4); and in legislation on the Inter-American Development Bank, 22 U.S.C. §283r, Asian Development Bank, 22 U.S.C. §2850, the World Bank and IDA, 22 U.S.C. §284j.

6 See note 21,infra.

7 See,èg;., Smith, D. & Wells, L., Negotiating Third World Mineral Agreements: Promises as Prologue (1975)Google Scholar; Symposium, , The Changing Framework of Concession Agreements and the Oil Industry, 7 Vand. J. Trans. L. 279 (1974)Google Scholar; Symposium, , Mining the Resources of the Third World, 67 ASIL Proc. 227 (1973)Google Scholar; Vernon, , Long-Run Trends in Concession Contracts, 61 ASIL Proc. 81 (1967).Google Scholar

8 See the extensive review of valuation problems in 1-3 R. Lillich, Valuation of Nationalized Property in International Law (1972-75). For a domestic valuation problem that,inter alia, raises the question of government action that devalues the enterprise before the taking, see Note, Valuation of Conrad under the Fifth Amendment, 90 Harv. L. Rev. 596 (1977).

9 L. Fbanko, Joint Venture Survival in Multinational Corporations (1971). According to Rose, , Why the Multinational Tide is Ebbing (Fortune, Aug. 1977, at 111)Google Scholar, sales of overseas subsidiaries are at a “breakneck pace.”

10 The earlier international tribunal cases cited by the commentators are principally Gowen b-Copeland, 4 J. B. Moore, History and Digest of International Arbitrations to which the United States has been a Party 3354 (1898) (after Venezuela seized claimants’; guano operations they were forced to make a disadvantageous deal—; “in the nature of a forced sale “—;with Venezuela’;s protégé company) and EUerman c. Etat Polonais, 5 Trib. Arb. Mixtes 457 (1924) (involved expulsion of German landowner but seems not to have directly faced the issue since there never was a sale).

11 Bernstein v. van Heyghen Freres S.A., 163 F.2d 246 (2d Cir. 1947), cert, denied, 332 U.S. 772 1948; Bernstein v. N.V. Nederlandsche-Amerikaansche Stoomvart Maatschappij, 173 F.2d 71 (2d Cir. 1949); 210 F.2d 375 (2d Cir. 1954).

12 Zwack v. Kraus Bros. & Co., 237 F.2d 255 (2d Cir. 1956) affg 133 F.Supp. 929 (S.D.N.Y. 1955). Firma Wichert v. Wichert, 1948 ANN. DIG. 23 (Fed. Trib. Switz. 1948), similarly ignored a transaction wrested from an accused in prison by the Czech Authorities

13 The Declaration of London appears at 1943-1 FOB. REL. U.S. 443. Government Law No. 59 (1947) on the Restitution of Identifiable Property in Article 2 denominated as a “;confiscation” any deprivation by a “transaction contra bonos mores, threats or duress.” Article 30 made a person who obtained property through “threats made by him or on his behalfˮ liable not only for restitution of the property but for profits or damages from the taking. Similar rules as to duress transfers formed part of the postwar internal legislation of most occupied countries. Robinson, , War Damage Compensation and Restitution in Foreign Countries, 16 L. & Contemp. Prob. 347, 363, 366, 367–368, 371, 373 (1951)Google Scholar. Rules as to the definition of coercion, the burden of proof, etc. varied.

14 See Foreign Claims Settlement Commission of the United States, Decisions and Annotations 88, 222, 390, 594-95 (1968). The annotations are unfortunately tantalizingly terse. In general the Commission took the position that tense conditions prevailing in Eastern Europe in the 1940’;s were not sufficient by themselves to establish duress. Inadequacy of price was pointed to as a sign of duress (at 594-95). In some eases the duress argument worked against the U.S. claimant by invalidating the claimant’;s acquisition of the property on which the claim was based (Claim of F. W. Woolworth, at 595).

15 1 Lillich, R. & Weston, B., International Claims, their Settlement by Lump Sum Agreements 171 (1975)Google Scholar; see also Weston, B., International Claims: Postwar French Practice, 124-26, 154–56 (1971)Google Scholar. Différend Industrie Vicentine Elettro- Mecchaniche (I.V.E.M.), 13 UN Rep. Int. Arb. Awards 324 (1952), was a case under the Treaty of Paris; there an Italian group was held to have extracted a surrender of the French interest in a troubled firm in Italy so as to require compensation under the treaty’;s provision on “mesures de force ou de contrainte.”; I.V.E.M. was in difficulty because (a) it had been sequestered as alien property, (b) wartime conditions made it impossible to carry on its production as before, and (c) it was in default on its obligations. The Italian Government “in a climate created by the armistice with France and by a long exaultation of autarky”; pressed for an elimination of the non-Italian interests. The government had, however, proposed a payment of 60 lire per share whereas the Italian firm insisted upon the transfer being gratuitous save for the assumption of certain obligations. The arbitrator noted that the fact that a decision was made because of a state of need (metus a causa necessaria) did not render it voidable since “nearly all contracts could be annuled as having been concluded under the iron laws of supply and demand “—;citing Italian authority. It found something more not in the sequestration which was legal under international law, but in the special steps Italy took to render the pressure to sell intolerable. See also Différend Wagons-Citemes 13 id. 212 (1950), holding a transfer of railway cars by the French national railroad to Italy to be the result of “une contrainte moral réelle et inévitable.”

16 Osthoff v. Hofele 1 U.S. Ct. Rest. App. I l l (1950) (Germany).

17 Stadt Friedberg v. Kasino Friedberg, 3 U.S. Ct. Rest. App. 680 (1952) (social club forced to sell by pressures on its members); Poehlmann v. Kulmbacher Spinnerei A.G., 3 U.S. Ct. Rest. App. 701 (1952) (boycott of once prosperous hotel forced sale); Stadt Wuerzburg v. Institut der Englischen Fraeulein, 3 U.S. Ct. Rest. App. 753 (1952) (official closing of school compelled sale).

18 See Christie, supra note 1, at 328. A few representative cases are Kleinschmidt v. Liebmann, 1 U.S. Ct. Rest. App. 104 (1950) (price less than 50% of value); Hussy v. Stern, 4 U.S. Ct. Rest. App. 228 (1954) (RM1.000 for house worth RM16,000). In Kapphan v. Steine und Erden G.m.b.H., 5 U.S. Ct. Rest. App. 487 (1955), a price of RM1,000,000 for a quarry though “undoubtedly less than market”; was found not to be shockingly low so as to justify a label as confiscation. But some transactions involving proven threats were set aside where the discrepancy was not so great,e.g., Poehlmann v. Kulmbacher Spinnerei A.G.,supra note 17 (price totaled RM 100,000

19 Restatement (Second) Foreign Relations Law of the United States §192, illustration 1 (1965) [hereinafter cited as Restatement].

20 Sohn, L. & Baxter, R., Convention on the International Responsibility of States for Injuries to Aliens 26, 191 (12th draft, 1961)Google Scholar.

21 The OPIC clause in use in late 1975 (234 KGT 12-70) appears at H. Steinek & D. Vagts, supra note 3, at 474-75.

22 74 Dept. State Bull. 138 (1976).

23 As to the private power to settle claims, see Restatement, supra note 19, at §203; L. Sohn & R. Baxter, supra note 20, at 190; 1 M. Whiteman, Damages in International Law 179-87 (1937).

24 Shea, D., The Calvo Clause (1955)Google Scholar; Graham, , The Calvo Clause: Its Current Status as a Contractual Renunciation of Diplomatic Protection, 6 Texas Int. L.F. 289 (1971)Google Scholar; Restatement, supra note 19, at §203.

25 GA Res. 1803, 17 GAOR, Supp. (No. 17) 15, UN Doc. A/5217 (1962). The background is set forth in Schwebel, , The Story of the U.N.’s Declaration on Permanent Sovereignty over Natural Resources, 49 A.B.A.J. 463 (1963)Google Scholar.

26 GA Res. 3281, 29 GAOR, Supp. (No. 31) 50, UN Doc. A/9631 (1974), 69 AJIL 484 (1975), 14 ILM 251 (1975).

27 The cancellation of an alien’s license without cause it strictly controlled by international law according to Restatement, supra note 19, at §196. See also the license cases of the Restitution courts cited in note 17 supra.

28 The official name is the Covenant Respecting the Limitation of the Employment of Force for the Recovery of Contract Debts, 1907, 36 Stat. 2241, TS 537.

29 UN Doc. A/CONF.39/27, 63 AJIL 875 (1969).

30 GA Res. 2625, 25 GAOR, Supp. (No. 28) 121, UN Doc. A/8028 (1970), 65 AJIL 243 (1971), 9 ILM 1292 (1970). See also Article 32 of the UN Charter of Economic Rights and Duties of States, supra note 26 and Article VI of the Final Act of the Helsinki Conference (CSCE), [1975] DIGEST OF INT. L. 9.

31 Paust, & Blaustein, ,The Arab Oil Weapon—A Threat to International Peace, 68, AJIL 410, 413 (1974).Google Scholar

32 A wide variety of articles on international coercion are assembled in Economic Coercion and the New International Economic Order (R. Lillich ed. 1976) and in a symposium at 12 Texas Int. L.J. 1 (1977).

33 Art. 38(c), Statute of the International Court of Justice.

34 The greatest contribution to an understanding of the law of duress is to be found in the work of John Dawson: Unconscionable Coercion: the German Version, 89 Harv. L. Rev. 1041 (1976); Economic Duress and the Fair Exchange in French and German Law, 11 Tulane L. Rev. 345 (1937); 12 id. 42 (1937);Economic Duress—;An Essay in Perspective, 45 Mich. L. Rev. 253 (1947).See also the extended coverage in 5 S. Welliston, Contracts, Ch. XLVII (rev. ed. 1937).

35 The pre-1800 status of the law of duress and unfairness is complex and easy to oversimplify. Indeed, it may be true that the rules on duress expanded somewhat as the older rules permitting the courts to set aside contracts on the basis of inequality of values were cut back.See the writings of Dawson, supra note 34; Horowitz, , The Historical Foundations of Modem Contract Law, 87 Harv. L. Rev. 917, 923–36, 950 (1974)Google Scholar.

36 Jolley v. Ins, 441 F.2d 1245 (5th Cir. 1971),cert, denied, 404 U.S. 946 (1971) (pressure of U.S. selective service does not render renunciation involuntary); Stipa v. Dulles, 233 F.2d 551 (3d Cir. 1956) (economic duress in Italy may be defense to expatriating conduct).

37 248 U.S.67 (1918).

38 Jd.70.

39 315 U.S. 289 (1942).

40 Id. 301

41 For recognition of a duty to bargain at an international level, see North Sea Continental Shelf cases, [1969] ICJ Rep. 4, 47; Fisheries Jurisdiction case, [1974] ICJ REP. 175, 201-07.

42 For a description of a case in which the United States took over negotiations at an early stage and conducted them vigorously, see Gantz, , The Marcona Settlement: New Forms of Negotiation and Compensation for Nationalized Property, 71 AJIL 474 (1971)Google Scholar. Note, however, that the Peruvian action there was straightforwardly labelled expropriation. During the last few years informal and discrete gestures have been made by the Department of State in several potential forced sale situations.

43 For a review, see INt. Chamber of Comm., Bilateral Treaties for International Private Investment (1970). For examples, see Egyptian-United Kingdom treaty of 1975, 14 ILM 1470 (1975) and Singapore-United Kingdom of 1975, 15 ILM 591 (1976).

44 The OECD guidelines appear at 75 Dept. State Bull. 83 (1976). While the guidelines themselves are addressed to enterprises, they are accompanied by decisions