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Contractual rights

In Waste Management v. Mexico, the NAFTA Chapter 11 Tribunal declined to find a violation of Article 1105 for a breach of contract. The Tribunal noted that NAFTA Chapter 11 is not a forum for the resolution of contractual disputes, and that, “Investment Treaties are not insurance policies against bad business judg- ments.”[1] The Tribunal also declined to find that the breach of contract was tantamount to expropriation. The Tribunal noted that any serious breach of contract could result in the loss of benefits or expectations, but this is not a sufficient criterion for concluding that there is an expropriation; NAFTA Article 1110 is not intended to compensate for failed business ventures, in the absence of arbitrary intervention by the State amounting to a virtual taking of the enterprise.[2]

The Waste Management Tribunal addressed the question when a persistent and serious breach of a contract by a State organ can constitute expropriation of the right in question, or at least conduct tantamount to expropriation ofthat right, for the purposes ofArticle 1110.[3] There are three categories ofcases: (1) cases where a whole enterprise is terminated or frustrated because its functioning is simply halted by decree or executive act, usually accompanied by other conduct; (2) cases where there has been a taking of property and associated contractual rights are affected in consequence, in which cases the bundle of rights to be compensated includes all the associated contractual and other incorporeal rights, unless these are severable and retain their value in the hands of the claimant notwithstanding the seizure of the related property; and (3) cases where the only right affected is incorporeal, which come closest to a claim of contractual nonperformance and in which a simple assertion that “property rights are created under and by virtue of a contract” is not sufficient. Whereas any private party can fail to perform its contracts, nationalization and expropriation are inherently governmental acts. An investor faced with a breach of contract by its governmental counter-party, which does not take the form of an exercise of governmental prerogative, should sue in the appropriate court to remedy the breach. Claims for expropriation are appropriate only where such access is legally or practically foreclosed, so that the breach could amount to a definitive denial of the right that amounts to an effective taking of the investor’s property. Thus, the Tribunal concluded that foreign investment law distinguishes between the expropriation of a right under a contract and failure to comply with the contract. Noncompliance by a government with contractual obligations is not equivalent or tantamount to an expropriation. The test for an expropriatory taking of contractual rights requires an investor to prove an effective repudiation of the right, unredressed by any available remedies, which has the effect of preventing its exercise entirely or to a substantial extent.[4]

  • [1] Waste Management, Inc., Award, para. 114; Emilio Agustin Maffezini v. Kingdom ofSpain, ICSIDCase No. ARB/97/7, Award (November 13, 2000), (2002) 5 ICSID Reports 419, para. 64; CMS GasTransmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Tribunal onObjections to Jurisdiction (July 17, 2003), (2003) 42 ILM 788, para. 29; Eudoro A. Olguin v. Republicof Paraguay, ICSID Case No. ARB/98/5, Award (July 26, 2001), (2004) 6 ICSID Reports 164, paras.72-5.
  • [2] Waste Management, Inc., Award, paras. 159-60.
  • [3] Waste Management, Inc., Award, para. 165.
  • [4] Waste Management, Inc., Award, paras. 171—6.
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