Under customary international law and most investment treaties, a state may lawfully expropriate foreign-owned property only if the taking is for a public purpose, non-discriminatory, conducted under due process, and accompanied by compensation. The amount and timing of that compensation is the most heavily litigated element.
The dominant formulation is the "Hull rule," articulated by U.S. Secretary of State Cordell Hull in a 1938 diplomatic exchange with Mexico over oil and agrarian nationalizations, which demands compensation that is prompt, adequate, and effective. "Adequate" is generally interpreted as the fair market value of the asset immediately before the taking became public knowledge; "prompt" means without undue delay; and "effective" means paid in convertible currency.
Capital-importing states historically resisted this standard. UN General Assembly Resolution 1803 (1962) on Permanent Sovereignty over Natural Resources required "appropriate compensation," and the 1974 Charter of Economic Rights and Duties of States (Resolution 3281) went further, suggesting compensation be determined by the host state's domestic law. Neither displaced the Hull rule for states bound by investment treaties.
Today the operative source is usually a bilateral investment treaty (BIT) or investment chapter of an FTA, most of which codify the Hull formula. Tribunals at ICSID and under UNCITRAL rules apply it to both direct expropriation (formal title transfer) and indirect or "creeping" expropriation (regulatory measures that destroy the asset's value).
Key arbitral touchstones include Amoco International Finance v. Iran (1987, Iran–U.S. Claims Tribunal), which surveyed valuation methods, and Compañía del Desarrollo de Santa Elena v. Costa Rica (ICSID, 2000), holding that even a lawful environmental taking required full market-value compensation. Valuation typically uses discounted cash flow for going concerns, or book/replacement value for non-revenue-generating assets. Interest from the date of taking is generally added.
Example
In the 2012 ICSID award *Occidental v. Ecuador*, the tribunal ordered Ecuador to pay roughly US$1.77 billion (later reduced on annulment) after finding that its 2006 termination of Occidental's oil participation contract amounted to an unlawful expropriation requiring full compensation.
Frequently asked questions
Lawful expropriation meets the public purpose, non-discrimination, due process, and compensation requirements; unlawful expropriation fails one or more, which can increase damages beyond fair market value to include consequential losses.
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