otherwise legally responsible under local law. The agreements require that reimbursement be made in both situations by the sending state on a pro rata basis, usually 75 percent of the amount of the claim allowed by the receiving state.

The amendment to 10 U.S.C. 2734a(a) provides for reimbursement or payment to foreign governments in the "otherwise legally responsible" category mentioned above. It removes a possible ambiguity as to the method of settlement of claims, which under the agreements can be adjudicated by a foreign country under its laws and regulations, including settlement by administrative action. It also provides for payment in cases of settlement by arbitration, a method provided for in the status of forces agreements unless the contracting parties agree otherwise.

For consistency, the legislation makes a corollary amendment in section 2734b which relates to the payment or reimbursement to the United States for claims arising in the United States resulting from property loss, personal injury, or death as the result of the acts or omissions of a civilian employee or member of an armed force of a foreign country.

See also H. Rept. No. 94-543; S. Rept. 94-1121.

Expropriation

Richard J. Smith, Director of the Office of Investment Affairs, Department of State, discussed U.S. policy on expropriation in relation to the protection of U.S. private interests abroad, in an address at Vanderbilt University on April 9, 1976. The following are excerpts from Mr. Smith's address:

Our policy can be simply stated: we recognize the right of any country to expropriate the property of a U.S. investor, in the absence of specific governmental undertakings to the contrary, so long as the taking is nondiscriminatory, for a public purpose and accompanied by prompt, adequate and effective compensation. In our view, these are the minimum standards under international law.

The issue of whether a "taking" has in fact occurred is often not obvious. Further, the determinations of how much is "adequate," and how prompt is "prompt" are far from trivial matters. These are among the questions that the Inter-Agency Expropriation Group, under the auspices of CIEP (Council on International Economic Policy) must wrestle with in its monthly meetings which typically deal with an agenda that includes a review of a dozen or more complex investment disputes. This inter-agency group is charged with reaching determinations regarding appropriate U.S. Government actions in particular disputes, including, where appropriate, the cessation of aid, withdrawal of support for loans

from international development banks, and withdrawal of trade preferences under the Hickenlooper and Gonzalez amendments and the Trade Act, respectively.

In many cases, investment disputes arise from actions short of formal nationalization, but which nevertheless may be expropriatory in effect. Such actions include intervention, cancellation or forced renegotiation of contracts or concession agreements, coerced sales or "participation" arrangements, and the raising of taxes to confiscatory levels. Whether a particular action is expropriatory must be evaluated in light of all the relevant circumstances of the particular case, and this makes it more necessary than ever to carefully review investment disputes on a case-by-case basis to fully develop all the relevant facts.

Once it appears that a "taking" of American-owned property has occurred or is about to occur, it is the longstanding and continuing position of the U.S. Government that international law requires payment of fair market value, calculated as if the expropríatory act had not occurred or were not threatened. Since market value is often not directly ascertainable, and since there usually are not recent sales of comparable properties to which to refer, market value generally must be approximated by indirect methods of valuation. These include:

-The going-concern approach, which attempts to measure earning power (and so encompasses elements such as loss of future profits which may be based on projections of past earnings or estimates of future earnings), and which in the view of the U.S. Government generally best approximates market value. We recognize that there may be circumstances in which application of this method is impracticable, or where it might operate unfairly; for example, where an investment has a limited history of operating results, or where expropriation occurs after significant costs are incurred but before a revenue-generating stage is reached. This method of valuation is also vulnerable to governmental actions which adversely affect profitability, such as increased taxes, threat of cancellation of contractual or concessionary rights, or withdrawals of privileges. We believe that such actions taken for the purpose of or which have the effect unfairly of influencing compensation may not properly be allowed to do so.

The replacement cost of the property at the time of expropriation less actual depreciation, a standard which is likely to yield an amount substantially greater than book value but which does not take into account earning capacity, is of limited use in valuing intangibles, and, in our view, is generally less acceptable in most circumstances than the going-concern approach.

-Book value, or some variation of it, which (unlike the replacement-cost approach) values assets at acquisition cost less depreciation-a figure which in most cases bears little relationship to their actual value. We believe this to be generally the least acceptable method for valuation of expropriated property.

We recognize that no single method of valuation is valid under all circumstances. The method or combination of methods most likely to provide just compensation for expropriated property varies, and depends upon the attendant circumstances of the particular case. We also recognize that nonmonetary aspects of

settlements-for example, assured access to sources of supply, preferential pricing, or new arrangements for the provision of technical or other services on a contractual basis-may in certain instances constitute elements of compensation.

We believe that issues concerning valuation of expropriated property are best resolved by the parties themselves through negotiation, and stand ready to facilitate discussions between the parties aimed at achieving a mutually acceptable outcome. Since questions of valuation often pose complex and sensitive issues in cases of expropriation, we also support independent appraisal as a procedural method for resolving them. More broadly, we favor agreement in advance on dispute settlement mechanisms applicable to the full range of contentious issues capable of arising between host governments and foreign investors, and subsequent resort to them as required by the parties' legal obligations. In such cases, failure to meet such arbitral or other obligations of itself may constitute a denial of justice in violation of international law. We particularly encourage use of the facilities of the International Centre for the Settlement of Investment Disputes (ICSID), a member of the World Bank Group and the major existing international institution intended specifically to help resolve investment disputes.

Our policy concerning valuation of expropriated property was most recently elaborated in a public statement on "Foreign Investment and Nationalization" issued by the Department of State on December 30, 1975. [See the 1975 Digest, pp. 488-489.]

Now to the "why" of U.S. expropriation policy. . . . Clearly, it is one of the most basic responsibilities of a government to seek to protect the lives and the property of its citizens whether at home or abroad. But this narrow answer based on our consular protection function does not net the whole story. There is a broader reason based on our view of the world and our aspirations for it that more fully explains the depth of our feelings regarding this issue.

It has been a fundamental U.S. policy throughout the post-World War II period to seek to contribute to the ability of the developing countries to successfully meet their development goals. ... we are convinced that substantial flows of private capital, with the technology, know-how, and management skills that accompany it, are essential to this development process. Government to government and multilateral aid also has a role, but it cannot substitute for these private resource transfers.

Inadequately compensated expropriations constitute a major threat to these critical private investment flows. Private investors come from environments in which private property rights are recognized and assured and will not continue to put their assets at risk in countries in which these rights are not respected. Indeed, nearly 80 percent of all private direct foreign investment takes place among the developed countries and the indications are that this percentage is increasing.

Unless the trend towards inadequately compensated expropriations is arrested, the prospects for the developing countries receiving the levels of investment, in energy resources or

elsewhere, which they require in the era of capital shortage we are now entering, is not good. This is a major reason why the U.S. Government views the expropriation issue as such a serious one. Dept. of State File EB/IFD/OIA.

§ 3

Claims Settlement Agreements
U.S. - Egypt

The Governments of the United States and the Arab Republic of Egypt, on May 1, 1976, signed an agreement (ad referendum) providing for the payment of a lump sum of $10,000,000 in compensation of private claims of nationals of the United States. The agreement entered into force on October 27, 1976, upon an exchange of notes stating each Government's final approval (TIAS 8446; 27 UST).

The lump sum under the agreement is to be paid in six semiannual installments, beginning on January 10, 1977, and is agreed to be in full settlement and discharge of all the claims of nationals of the United States against the Egyptian Government which are described in the agreement. These are specified in article II to be claims of nationals of the United States for "Property, rights and interests in Egypt affected by Egyptian measures of land reform, against such property, rights and interests, as well as financial and fiscal matters decreed by the Arab Republic of Egypt, which occurred since January 1, 1952, and before the entry into force of this Agreement."

The distribution of the lump sum is declared to fall "within the exclusive competence of the Government of the United States in accordance with such methods of distribution as it may choose to adopt, without any responsibility arising therefrom for the Egyptian Government."

An agreed minute, signed May 1, enumerates the official claims of the U.S. Government and the private claims of U.S. nationals which are excluded from the agreement because they were considered by Egypt to be outside the competence of the Joint U.S.-Egyptian Committee on Claims, whose jurisdiction was limited to consideration of claims of U.S. nationals for property, rights and interests affected by Egyptian measures of land reform, sequestration, expropriation, confiscation and other restrictive measures. The agreed minute states the intention of the U.S. Government to raise the enumerated claims for negotiations through diplomatic channels.

The Department of State announcement of May 3, 1976, reporting signature of the agreement stated that the claim of the American Mission in Egypt (United Presbyterian Church in the U.S.A.) was covered by the agreement and was being settled to the Mission's

satisfaction. Details concerning that claim were agreed upon in a related exchange of notes of May 1, 1976.

Dept. of State File L/T. See also Dept. of State Bulletin, Vol. LXXV, No. 1932, July 5, 1976, p. 38.

U.S.-Peru

In a note dated June 11, 1976, presented to the Minister of Foreign Relations of Peru by the U.S. Ambassador in Lima, the United States protested charges brought by the Attorney General of Peru against the Star-Kist Corporation and two of its representatives. The charges appeared to be based on an interpretation by the Peruvian Attorney General, differing from the U.S. interpretation of certain aspects of the agreement between the United States and Peru of February 19, 1974, concerning claims arising out of the nationalization by the Government of Peru of certain investments of U.S. nationals (TIAS 7792; 25 UST 227). See the 1974 Digest, pp. 419-422. The Attorney General also charged former Peruvian Fisheries Minister Tantalean and two subordinates with fraud against the state for having given property of the state to Star-Kist without compensation, apparently on the assumption that the 1974 agreement covered all assets, not only fishmeal but also human consumption assets, and that when human consumption assets were turned back to Star-Kist, the Government of Peru was not paid for them.

The U.S. note of June 11, 1976, stated, in relevant part:

[I]t was clearly understood between our two Governments that the amount paid by the Government of Peru to the Government of the United States pursuant to the agreement did not include compensation for those assets of Compania Pesquera de Coishco, S.A. devoted to the production of fish products for human consumption. This mutual understanding was based on the fact that the rights of Star-Kist Overseas, Inc. with respect to those assets were confirmed by the Government of Peru prior to the date of the agreement. Accordingly, only the assets of the corporation involved in the production of fish meal, which assets had been taken by the Government of Peru, were compensated. This understanding that the human consumption assets of Star-Kist were not within the scope of the agreement was specifically recognized by the Government of Peru in a letter from Your Excellency to my predecessor, Ambassador Belcher, dated February 19, 1974.

With respect to the amount of compensation actually received by the Star-Kist Corporation, it should be noted that pursuant to article III of the agreement, the distribution of the sums paid by the Government of Peru fell within the exclusive competence of the Government of the United States. Thus, it is not appropriate or relevant for the Attorney General of Peru to compare the amount actually received by Star-Kist to any valuation of the various assets