OpinioJuris | 14 July 2022
Is investor-state dispute settlement an appropriate forum for the resolution of investment disputes arising from armed conflicts? Part 2: the quest to find a just and equitable remedy
by Amanda J. Lee and Naimeh Masumy
[Amanda J. Lee, FCIArb is an International Arbitrator and Consultant at Costigan King, and the Founder of Careers in Arbitration and ARBalance. Naimeh Masumy is a research fellow at the Swiss International Law School and a dispute resolution expert specialized in energy and investment disputes.]
In the first part of this two-part blog series, we addressed the absence of a coherent legal framework for the protection of foreign investments in times of armed conflict, and the suitability of ISDS as an adjudicative forum for disputes of this nature.
Having identified a number of shortcomings, in this second part, we explore the limited role of public international law in ISDS proceedings (I), and propose the creation of an alternative adjudicative body (II). We conclude by briefly identifying some of the challenges presented by such proposal (III).
I. The Limited Role of Public International Law
As explored in part one, the institutional design of ISDS makes it more suitable for private dispute resolution than as a comprehensive international forum capable of resolving disputes arising from armed conflicts. The role of international law as a substantive system of rules capable of shaping and influencing investment awards is conspicuously narrow. This is evidenced by the loosely defined references to international law in many investment treaties.
The limited role of international law in ICSID disputes is evident from Article 42 (1) of the ICSID Convention, which recognizes the primacy of ‘such rules of law as may be agreed by the parties’, over international law rules. Unless the parties agree otherwise, the ICSID Convention expressly provides that tribunals shall apply the law of contracting State parties to the dispute. Although the drafters acknowledge the role of international law and the tribunal’s ability to apply existing general principles of law, such role is assumed to be supplementary or complementary in nature. The nature of its interaction with or primacy over national law remains unsettled.
The supplementary role of international law is further evident from the way in which tribunals interpret the principles of proportionality and necessity. Although such principles may serve as a legal basis to justify otherwise wrongful State conduct during times of armed conflict, the applicable threshold is relatively high.
A further example of a tribunal declining to attribute importance to international law is Totov v Lebanon. The award makes clear that the tribunal attributed responsibility based on the State’s failure to protect an investment, not military acts. This case, together with others addressing necessity, suggests that tribunals have established a high threshold for the application of the precautionary principle, which does not preclude States from compliance with obligations on the basis of necessity, or following the outbreak of hostilities.
Similarly,in AMT v Republic of Zaire, the applicable treaty provided that “the protection and security and investment shall be in accordance with the applicable national law, and may not be less than recognized by international law”. The tribunal treated this obligation as a strict one, applying a relatively high threshold. It observed that the Republic of Zaire was responsible for its inability to prevent the disastrous consequences of the events that adversely affected its obligation to protect. In fact, the obligation to take precautionary measures to protect the Claimant’s investment was invoked based on a mere omission or failure to protect.
II. Proposed Solution: The Remedial Tribunal
As discussed in part one and above, the jurisdictional limitations and format prevent ISDS from delivering justice for those affected by armed conflict. ISDS cannot fully address the complexities of such disputes as important aspects will inevitably be overlooked due to normative conflicts, and the inability of ISDS tribunals to attribute damage to culpable third-party aggressor States.
Our proposed forum, which we refer to below for convenience as the ‘Remedial Committee’ and which would produce arbitral awards compliant with the New York Convention, will have the following characteristics:
A Comprehensive General Forum
In order to achieve a just resolution of investment disputes arising from armed conflict and discourage further violence, a comprehensive and inclusive transitional justice forum is required. Such body should be capable of applying humanitarian considerations such as jus ad bellom and other universally accepted international legal rules. Under its auspices, the duty to make full reparation should be guided not by the wording of IIAs, but instead by the principles of ‘corrective justice’, ‘relational justice’ and ‘deterrence’.
This is of particular importance when one recognizes the clear potential for hypocrisy should an investor from an aggressor State demand compensation from a host State in respect of claims that have arisen solely because of the unlawful actions of its home State. Investors may even have supported such aggression.
To effectively apply these principles, the Remedial Committee must enjoy an extensive mandate to make inquiries and findings consistent with fundamental principles of international law, such as the Draft Articles on Responsibility of States for Internationally Wrongful Acts, which provides that “[t]he responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act.
Unlike ISDS tribunals, the Remedial Committee must be entitled to avail itself of the full might of international law, including The Hague Convention for the Protection of Cultural Property, 1954; the Geneva Conventions, which recognize that States cannot absolve themselves or any other contracting party from liability incurred during war, and the 1907 Hague Regulations concerning the Laws and Customs of War on Land, which oblige contracting parties to pay compensation in numerous post-conflict circumstances.
Applying fundamental rules of international law will allow the Remedial Committee to more equitably define the scope of States’ duties vis á vis investors whose property has been destroyed, and provide them with a direct right of action. The Remedial Committee’s mandate should be tailored to acknowledge contextual elements of specific conflicts in order to avoid placing burdensome compensation obligations on non-aggressor States, which could cripple economies for years to come. Thus, to achieve justice as between those affected by armed conflict, the core mandate of the Remedial Committee should pay due regard to the constraints of international law.
Particular importance may be placed on a host State’s need to guarantee an adequate standard of living for both its population and foreign investors in a post-conflict setting, with appropriate consideration of equity, due diligence, the socio-economic well-being of affected populations, and the likely scarcity of resources post-conflict. In so doing, the Remedial Committee must reach a fair balance between the interests of claimants, and society as a whole.
When defining the scope of a host State’s duty to make reparation, the Remedial Committee should pursue relational justice, deterrence, and the enforcement of obligations, restoration, and restitution in integrum as overarching goals. When calculating damages, focus should be placed on State conduct, instead of alleged loss. Grounds for establishing States’ responsibility within international constraints may accordingly be identified. Serving the broader purpose of achieving corrective justice in relation to armed conflict should be of paramount importance.
Corrective justice is not confined to undoing the consequences of wrongdoing, rather, it is charged with identifying and isolating parties’ non-compliance with, or breaches of, international Conventions in order to restore the afflicted State, as far as possible, to the position that it was in before the aggressor’s breach of international obligations. To this end, the following should be taken into account:
Due Diligence Obligations and Exercise of Territorial Control
Based on current investment tribunal practice, host States will typically be held prima facie responsible for any destruction of foreign investments. It is likely—and regrettable—that investment tribunals do not give due consideration to contextual elements or due diligence obligations when establishing the duty to repair, and lack jurisdiction to join third-party States to the proceedings.
In contrast, when the Remedial Committee is tasked with determining the scope of and responsibility for making full reparation, due consideration may be given to the host State’s due diligence obligations during times of armed conflict. Such obligations impose a twofold duty to protect investors’ rights by taking steps to prevent abuses by third parties, and to investigate them after they occur. On such basis, host State reparation responsibilities will not be triggered by the mere destruction of a foreign investment. Rather, they will be triggered only if a host State failed to take reasonable measures to prevent or mitigate the harm, taking into account the degree of control that it possessed over the territory in question at the relevant time.
The due diligence obligation suggests that the foreign investor victim’s access to reparation may be circumvented or reduced to reflect the degree of control that the State’s authorities were able to exercise over their territory in conflict-related circumstances. These may include military occupation by foreign armed forces, or the presence of foreign forces in the occupied territory. Thus, the Remedial Committee should treat a State’s lack of de facto control over certain hostile regimes as a ground to preclude it from responsibility for interferences with private properties and the duty to repair, as reflected in the practice of the European Court of Human Rights.
An additional factor that informs analysis of the duty to repair is the extent to which reasonable measures were taken by host State authorities to regain control of the situation so as to restore peace, either through investigatory measures or preventive measures designed to mitigate further damage to private property. Thus, the Remedial Committee’s modifying factor for the calculation of compensation is the extent of State (mis)conduct, placing victims of wrongful loss in the periphery of the State’s responsibility and opening the door for an extensive inquiry to take place into measures taken by the real perpetrators, the circumstances in which violations occurred, and the extent to which liability may be attributed to such parties.
To this end, the Remedial Committee would avail itself of a wide range of contextual findings, such as a prevailing climate of repression, combined with widespread physical violence against the host State’s population and territory. In short, the host State’s failure to comply with the two-fold obligation to protect and investigate would perhaps be the key guiding principle for the Remedial Committee to consider before attributing liability to the host State. This principle will inform its reasoning on the calculation of damages.
When making submissions, host States would be able to identify contextual elements to demonstrate whether alleged grounds for relief are properly made out, addressing whether they were sufficiently aware of hostile situations, as well as demonstrating whether they took all reasonable steps to address violations. Such submissions may, for example, seek to demonstrate that an effective and independent investigation was conducted.
Socio-Economic Well-Being of States Affected by Armed Conflict
By adopting ‘relational justice’ as an overarching principle and guide for its analysis of the duty to compensate, the Remedial Committee can establish limits regarding a foreign investor’s access to reparations by taking into consideration the socio-economic circumstances of States post-conflict.
Investment tribunals tend to view reparation as a zero-sum game, in that the victim’s wrongful loss and the wrongdoer’s duty to repair correlate. This approach is predicated upon consequentialist considerations, namely that whether behavior is right or wrong is determined by the consequences. Intention is of no relevance.
Consequently, the duty of reparation arises from the (mis)conduct of an external agent, namely the aggressor State or force, regardless of the unfair burden imposed on the host State as a result. In other words, an ISDS tribunal will regard ‘wiping out the consequences of a State’s wrongdoing’ as a central theme when seeking to establish the existence of a duty to repair, whether or not what the State did was actually morally blameworthy.
However, we propose that the Remedial Committee be guided by the principle of ‘relational justice’, which emphasizes the use of reparation-related resources and their impact on the standard of living of both parties post-conflict. Relational justice follows deontological ethics, which stand in stark contrast to consequentialism. Relational justice attributes intrinsic value to State conduct, stressing the intrinsic rightfulness and wrongfulness of certain forms of conduct, and recognizing the extent to which States were able to foresee and potentially prevent the harm.
Thus, relational justice principles will inform the Remedial Committee’s perspectives about the intrinsic moral importance of the way social and political institutions, whether ad hoc or permanent, should operate. The Remedial Committee must accordingly be vigilant in its treatment of States, its recognition of the well-being of those affected by violence, and its relevance to justice, which is not just reducible to the traditional duty to repay.
Therefore, when determining whether the host State or an aggressor State has a duty to make reparation, the Remedial Committee may recognize the impact of a financially cumbersome award on a host State struggling with socio-economic distress not of its own making as a ground to place limits on the duty to repair. Whether granting reparation will give one party an unfair advantage over another is a valid consideration.
To encourage long-lasting peace between nations, the Remedial Committee should adopt deterrence as a primary goal. If aggressor States understand that they are likely to bear the financial burden of claims brought by investors against host States that have arisen due to aggression properly attributed to them, there is an added financial incentive to avoid violence and use diplomatic efforts to prevent and discourage future hostilities.
Although an award of investment-related damages should not serve a punitive function, making an award against wrongdoer States will, it is hoped, serve as an effective means of dissuading future unlawful conduct. Therefore, deterrence may justify an award that places emphasis on the need not only to compensate those who have suffered loss, but to correct an aggressor State’s conduct. Any unfortunate distributive consequences would be a small price to pay to discourage future aggression.
III. Challenges and Opportunities: The Quest Continues
ISDS is an unsuitable forum for the just resolution of investment disputes founded on the consequences of armed conflict. This is clear from the limits imposed on the jurisdiction of ISDS tribunals by the wording of BITs, the inevitable fragmentation of disputes, the inability to attribute blame for non-compliance to the third-party aggressor State(s) or force, and the potential for forum shopping.
In the circumstances, it is time for an alternative forum with a mandate guided by IHL norms, deterrence, a proper assessment of culpability, and the application of relational justice to be available to investors. The protection of foreign investors need not come at the cost of the economy of a State ravaged by the consequences of armed conflict. Only by enabling blame to be attributed to the correct party—the aggressor—can justice truly be done between innocent foreign investors and States.
The development of a Remedial Committee is not without its challenges, chief amongst which is the need to establish a basis for jurisdiction over both investors and States as a matter of international law, and address issues such as the basis on which it would determine the scope of responsibility for the alleged aggressor or aggressors. Accordingly, the quest to find a just and equitable solution has just begun.