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OP 7.40 - Disputes over Defaults on External Debt, Expropriation, and Breach of Contract

These policies were prepared for use by World Bank staff and are not necessarily a complete treatment of the subject.
OP 7.40
July, 2001
This Operational Policy statement was revised in March 2012 to take into account the provisions of OP/ BP 9.00, issued in February 2012.

Note: This OP 7.40 replaces OP 7.40, dated May 1996. Questions may be addressed to the Chief Counsel, Operations Policy.
Revised March 2012
1. The Bank1 takes an interest in disputes, arising out of certain international financial transactions, between a member country or a public body within a member country and nationals of other member countries. Such disputes consist primarily of three types: (a) disputes over a failure to service external debt in accordance with its terms; (b) disputes over compensation to aliens for property they own that has been expropriated; and (c) disputes over the breach of a governmental contract with aliens for goods or services.
Disputes over Defaults and Expropriation
Disputes over Defaults on External Debt
2. If the Bank receives notice that a member country is unwilling to take steps to resolve a dispute over its failure to service external debt and if the Bank deems such failure to have a significant effect on the member's creditworthiness or on its ability to implement Bank-financed projects/programs or service Bank loans, the Bank examines the procedures followed by the parties in addressing the issue and determines what action, if any, it should take.
3. If the Bank is seriously dissatisfied with the position taken by the member country, it may, at its discretion, decide not to make new loans to or with the guarantee of the member country until the country takes certain actions to rectify the situation. In making its decision, the Bank considers whether the circumstances of the default give rise to concern s about the member country's creditworthiness for continued Bank lending.
4. If the defaulting debtor is a political entity or a public body for whose debts the member country is not legally responsible, the Bank normally limits any restrictions on lending (including suspension pursuant to applicable Loan Agreements) to the defaulting entity or body only and continues to lend to the member or other borrowers in the country. If debt service for such a defaulting debtor is maintained through payments by a guarantor, the Bank may, at its discretion, decide to apply such restrictions on its lending to only the original obligor that is in default. While lending is thus restricted, the Bank determines its other activities with respect to the member country or the defaulting body in light of the particular circumstances.
Disputes over Expropriation
5. The Bank recognizes that a member country may expropriate property of aliens in accordance with applicable legal procedures, in pursuance in good faith of a public purpose, without discrimination on the basis of nationality, and against payment of appropriate compensation. When there are disputes over expropriations that, in the opinion of the Bank, the member country is not making reasonable efforts2 to settle and that are substantially harming the country's international credit standing, the Bank considers whether to continue making new loans to or with the guarantee of the member country. Further, the Bank may decide not to appraise proposed projects/programs in such a country unless it has good grounds for believing that the obstacles to lending will soon be removed.
6. Even if the alien whose property was expropriated has received compensation through an investment guarantee or insurance scheme, the Bank generally determines its position toward the expropriating country as if such compensation had not been paid. The Bank takes into account whether or not the alien's government seeks redress from the expropriating country, and normally considers a dispute resolved if a settlement is reached between the expropriating country and the alien's country.
7. The Bank does not lend for the purpose of enabling a country to expropriate an enterprise by providing the funds needed for compensation. However, if the question of compensation is satisfactorily settled, the fact of expropriation does not, of itself, prevent the Bank from lending, in appropriate cases, to enlarge or improve properties that have been expropriated.
Bank Involvement in Disputes over Defaults and Expropriation
8. The Bank seeks to avoid passing judgment on the merits of the types of disputes described above (although it may eventually have to do so for the purpose of determining its own position). In general, the Bank limits its role to improving communications between the parties to the dispute and impressing on them the desirability of a settlement. The Bank may seek to promote prompt and adequate settlements, either negotiated between the parties on a mutually satisfactory basis or arrived at through mediation, conciliation, arbitration, or judicial determination. The Bank may point out to parties that they may submit their dispute to any of the various internationally recognized forms of conciliation or arbitration, including conciliation or arbitration under the auspices of the International Center for Settlement of Investment Disputes (ICSID), the World Bank Group organization established to facilitate the resolution of disputes between governments and foreign investors.
Disputes over Breach of Governmental Contracts
9. If a dispute over the breach of a governmental contract arises in connection with a Bank-financed project/program, the Bank's interest in having the project/program completed promptly and satisfactorily calls for a prompt and equitable settlement of the dispute. The Bank may assist in facilitating this result, usually through the normal processes of project/program supervision.
10. If the dispute does not involve a Bank-financed project/program, the Bank seeks to avoid any involvement in the issue. If no steps are being taken to resolve the dispute and if the existence of the dispute is likely to impair the country's general reputation for business-like dealings, the Bank may urge both parties to act promptly to resolve the dispute.
  1. "Bank" includes IBRD and IDA; "loans" includes IDA credits and IDA grants; and "Loan Agreement" includes Development Credit Agreement.
  2. In judging "reasonable efforts", the Bank gives the benefit of any reasonable doubts to the expropriating country for at least a brief period of time if the country demonstrates its willingness to accept independent dispute-settlement procedures or its recognition of the principle of compensation. The Bank takes serious negotiations or mediation efforts as evidence of reasonable efforts.

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