To attract foreign investments and ensure a favorable environment for foreign investors in Georgia, it is essential that the existing investment legislation complies with international standards and that the investor’s property rights are protected from unlawful expropriation. 在这方面, expropriation is one of the central issues in international investment law. The greatest risk that an investor always seeks to avoid is the state’s interference with property rights without providing adequate compensation.
From this perspective, the scope of protection of property rights is guaranteed by the Constitution of Georgia itself. According to Article 19, paragraph 1, the right to property and inheritance is recognized and ensured, while paragraph 3 provides that deprivation of property for necessary public needs is permissible only in cases directly defined by law, on the basis of a court decision, or in instances of urgent necessity established by an organic law, with prior, full, and fair compensation. Such compensation is exempt from any taxes or fees.
According to the Constitutional Court of Georgia, it has been explained that: “The formal–legal basis for justifying the restriction of the right to property consists of:
a) the provision by law of cases of necessary public need;
b) the establishment by law of the procedure for such restriction. This clause grants the legislator the authority to define the content of the right to property, but only on the condition that the legislator’s intent is adequate to the constitutional requirement. The legislator must equally take into account the guarantee of the right established by the Constitution and the requirements of the social property order, and must balance these interests[1].
In terms of investment law, it is important that, in cases of interference with an investor’s property (particularly expropriation), the application and interpretation of the applicable legislation take into account international practice and the international legal standards of expropriation.
The Meaning and Types of Expropriation
Property held by an investor, either as ownership or under another proprietary right, may be forcibly taken by the state, which constitutes one of the risks associated with making a foreign investment[2].
Expropriation is not always a uniform phenomenon and can take different forms. Expropriation may be “direct,” occurring when there is a physical seizure of property or the deprivation[3] of the owner’s proprietary rights. 此外, there can be indirect expropriation, which occurs when the state interferes with the investor’s ability to exercise ownership, use, or disposal rights over the property without formally depriving them of those rights. In other words, direct expropriation occurs when the investor’s property or possession is transferred to the state or used by the state or a third party, whereas indirect expropriation occurs when the state deprives the investor of the economic benefits[4] derived from the investment.
Indirect Expropriation and Related Issues
Identifying cases of indirect expropriation is a rather problematic issue, as it largely depends on distinguishing the specific circumstances under which state regulatory measures may be considered expropriation and, accordingly, trigger the obligation[5] to provide appropriate compensation. The state possesses the sovereign right to adopt regulatory measures, including the expropriation of private property, which is recognized under international law[6] and enshrined in UN documents, among which notable references include the Declaration on the Establishment of a New International Economic Order and the Charter[7] of Economic Rights and Duties of States.
According to the Multilateral Investment Guarantee Agency, “the nature of expropriation measures has changed: from direct expropriation (nationalization), which occurred in the 1960s[8], to indirect or ‘creeping’ expropriation in recent years.” Indirect expropriation takes place when, through the introduction of regulatory norms or the application of administrative measures, the state restricts an owner’s ability to use their assets and derive profit from them, limits or eliminates the legal possibility to transfer rights to such property, and/or otherwise negatively affects the value of the investor’s assets—while no formal transfer[9] of ownership to the state occurs.
Compliance of the Georgian legislative framework with internationally established standards on expropriation
A state’s interference with the private property of its own citizen or a foreign national does not, in itself, constitute a wrongful act. On the contrary, it is an expression of the state’s sovereignty and its rights over persons and property within its jurisdiction—an approach widely recognized at the international level. 例如, in Libyan American Oil Company v. The Government of the Libyan Arab Republic, the tribunal examined Libya’s nationalization of oil companies and stated that, although the nationalization in that specific case was unlawful, nationalization in general is an expression of a state’s territorial sovereignty[10].
然而, despite this sovereign right of the state, expropriation must be lawful and must comply with the standards and requirements established by international practice. Several general conditions have been recognized, and expropriation is considered lawful only when these conditions are met. These requirements are included in most international investment agreements, and for an expropriation to be lawful, all of them must be satisfied cumulatively. 具体来说, expropriation must be carried out in accordance with the so-called four-part test:
- a) for a purpose that serves the public interest;
b)in a non-discriminatory manner;
c) in compliance with due legal process;
d) with the payment of prompt, adequate, and effective compensation[11].
Several laws within the Georgian legislative framework regulate this area. According to Article 7, paragraph 2 of the Law of Georgia on “Promotion and Guarantees of Investment Activity,” expropriation of an investment is permissible only in cases expressly provided by law, pursuant to a court decision, or in situations of urgent necessity defined by organic law, and only with appropriate compensation. This provision identifies the statutory grounds under which expropriation is considered lawful. The laws that determine the legality of expropriation are the 1997 Organic Law of Georgia “On the Procedure for Deprivation of Property for Public Need in Cases of Urgent Necessity,” and the 1999 Law of Georgia “On the Procedure for Deprivation of Property for Essential Public Need.”
According to Article 2, paragraph 1 of the Law of Georgia “On the Procedure for Deprivation of Property for Essential Public Need,” expropriation for essential public need is carried out on the basis of an order issued by the Minister of Economy and Sustainable Development of Georgia and pursuant to a court decision, in favor of a state authority, a local self-government body, and/or a legal entity under public or private law that is granted the right of expropriation in accordance with this law. Paragraph 2 of the same article lists the circumstances under which expropriation may be carried out[12].
These four criteria for the lawfulness of expropriation are also reaffirmed in several of Georgia’s bilateral investment treaties. 例如, according to Article 5 of the Agreement between Georgia and the Republic of Austria on the Promotion and Protection of Investments, “Neither Contracting Party shall expropriate or nationalize an investment of an investor of the other Contracting Party, either directly or indirectly, nor take any measures having an equivalent effect (hereinafter referred to as ‘expropriation’), except where such measures are taken: (a) for the public interest; (b) on a non-discriminatory basis; (c) in accordance with due process of law; and (d) against prompt, adequate and effective compensation.”
Similar provisions appear in Georgia’s bilateral investment treaties with Japan, with the Republic of Estonia, and in other bilateral agreements.
The legislative framework discussed above is generally consistent with international standards for the protection of investments against unlawful expropriation. 然而, in the Georgian context, Article 20, Paragraph 6 of the Law of Georgia on State Property poses a problem. According to this provision, “If a privatization contract concluded for the purpose of privatizing state property is unilaterally terminated due to a violation of the privatization conditions stipulated in the contract, the privatized property shall return to state ownership, and any mortgage rights (or rights) of a third party registered on this property shall be nullified, provided that the relevant information reflecting the privatization obligations is recorded in the public registry before the property is encumbered by a mortgage. Furthermore, the state shall not compensate the acquirer for any amounts paid or expenses incurred.” This provision establishes a kind of sanction, which could arguably be regarded as tantamount to expropriation.
This provision was adopted in 2013 and carries significant risk if interpreted incorrectly and applied without proper regard to international standards for protection against expropriation. By its nature, the provision grants the state unlimited authority, without requiring any special justification, to terminate a contract in the event of any violation of investment conditions (without bilateral restitution). Under such circumstances, an investor has no claim against the state, while the state has the right to demand and seize the investments in full, without providing any compensation to the investor.
Given its nature, this arrangement should clearly be regarded as tantamount to expropriation and, consequently, must comply with the so-called “four-criteria test” discussed above. Improper use or interpretation of this provision poses a threat not only to the legal protection of international investments but also to property rights safeguarded by the Constitution of Georgia. In practice, it effectively eliminates the fundamental principle that expropriation should occur only with fair and full compensation.
Under such circumstances, it is essential that actions tantamount to expropriation by the state are not taken without compliance with the four-criteria test discussed above. Since the provision grants the state broad authority to disproportionately expropriate foreign investments, it is crucial that its proper interpretation takes into account that even a minor violation of the investment contract by the investor should not serve as a basis for imposing the sanctions specified in this article. Accordingly, in practice, when applying the provision, 法院 (or arbitration tribunal) must properly assess the severity and intensity of the contractual breach and avoid a superficial, purely literal interpretation. From the perspective of protecting foreign investments and safeguarding the investor’s property rights, the state, when applying and interpreting this and similar provisions, must be guided by the highest standards of expropriation protection.
[1] Decision of the First Chamber of the Constitutional Court of Georgia N1/2/384, Tbilisi, July 2, 2007
[2] Taking of property // United Nations Conference on Trade and Development. გვ.3 https://unctad.org/system/files/official-document/psiteiitd15.en.pdf
[3] Taking of property // United Nations Conference on Trade and Development. გვ.3 https://unctad.org/system/files/official-document/psiteiitd15.en.pdf
[4] Taking of property // United Nations Conference on Trade and Development. გვ.3 https://unctad.org/system/files/official-document/psiteiitd15.en.pdf
[5] Nikièma, S. H. Best Practices: Indirect Expropriation, March 2012, The International Institute for Sustainable Development
[6] Nikièma, S. H. Best Practices: Indirect Expropriation, March 2012, The International Institute for Sustainable Development
[7] Nikièma, S. H. Best Practices: Indirect Expropriation, March 2012, The International Institute for Sustainable Development
[8] World Investment and Political risk: 2011. Multilateral Investment Guarantee Agency
[9] World Investment and Political risk: 2011. Multilateral Investment Guarantee Agency
[10] https://jusmundi.com/en/document/decision/en-libyan-american-oil-company-v-the-government-of-the-libyan-arab-republic-award-tuesday-12th-april-1977
[11] 例如, see:. https://www.energycharter.org/process/energy-charter-treaty-1994/energy-charter-treaty/
[12] a) for the construction of roads and highways; b) for the laying of railway lines; c) for the installation of pipelines for crude oil, natural gas, and petroleum products; d) for the construction of electricity transmission and distribution lines; e) for the installation of water supply, sewage, and stormwater drainage lines; f) for the installation of telephone lines; g) for the installation of television cables; h) for the construction of buildings and facilities necessary for public needs; 我) for works required for national defense; j) for the extraction of mineral resources.
