The basic principle of State responsibility is, of course, that a State must make full reparation for any injury (whether material or moral) caused to another State or a foreign investor. A tribunal should therefore award an amount of compensation that is exactly equivalent to the actual moral damage suffered and should not award a single dollar in compensation over and above that.

The concept of moral damage is, however, vague and may be subject to different interpretations. The same is true for the quantification of moral damages. Thus, under the exact same circumstances, a certain type of moral damage that is considered by one tribunal to be worth US$10,000 in compensation could very well be deemed worth US$100,000 by another. There are only a select few instances where a tribunal, such as the UNCC, is bound by strict guidelines determining in advance the amount of compensation to be awarded for certain specific types of moral damages (see, UNCC Governing Council Decision no. 3, S/AC.26/1991/3 (23 October 1991); UNCC Governing Council Decision no. 8, S/AC.26/1992/8 (27 January 1992). In all other cases where no guidelines exist, tribunals will necessarily have a great deal of flexibility and discretion to determine what amount should adequately compensate an investor for the moral damage suffered. How should tribunals then exercise such discretion? This is where the issue of culpa matters.

The Desert Line award’s reference to “the physical duress exerted on the executives of the Claimant” which “was malicious and therefore constitutive of a fault-based liability” (para. 290) suggests that the Tribunal considered Yemen’s fault when finding its international responsibility. Similarly, in his concurrent and dissenting opinion in the Biwater v. Tanzania case, Arbitrator Born referred to Tanzania’s “deliberate” conduct causing moral damages to the Investor (para. 33). These statements seem to suggest that fault or malice by the host State is a condition for an award of compensation for moral damage. It should be recalled, however, that the work of the I.L.C. on State responsibility has clearly adopted the concept of the “objective” responsibility of a State whereby “it is only the act of a State that matters, independently of any intention” (J. Crawford, I.L.C.’s Articles on State Responsibility, Introduction, Text and Commentaries, at p. 84). In my view, malice or any other intent is clearly not a necessary precondition for a tribunal to award compensation for moral damages.

The presence of culpa will undoubtedly, however, have an impact on a tribunal’s decision with respect to the consequences of responsibility. Thus, State’s fault or malicious intent will be taken into account by tribunals when they actually quantify the amount of compensation to be awarded to remediate moral damages. This has long been recognised in doctrine as well as by the I.L.C. Special Rapporteur Arangio-Ruiz in his Second Report on State Responsibility (Yearbook ILC, 1989, vol. II, Part one, at para. 145 and 180: “[I]it seems both logical and rational, as recognized by a number of authorities, that the presence or absence of fault, and, if there is fault, the degree of wilful intent or negligence, play some role in the determination of the degree of responsibility and therefore of the forms and degrees of the reparation due”).

Thus, the amount of compensation should be proportionate to the seriousness of the offence committed by a State and its degree of responsibility. A tribunal may award a greater amount of compensation for moral damages in a situation where the conduct of the State is especially malicious or shocking. Simple common sense would dictate such a solution. This does not mean that there exists any higher threshold for finding a breach of international law in the context of moral damages claims. In my view, it is undesirable that only “egregious” State behaviour should result in awarding compensation for moral damages.

One illustration of the approach proposed here is the 1992 case of Letelier and Moffitt where the ad hoc Commission established by the United States and Chile awarded more than US$1 million in compensation for moral damages to three individuals and their heirs. This case arose from the assassination in 1973 in Washington of Mr. Letelier, a Chilean opponent to the Pinochet regime living in exile in the United States, by Chilean secret police agents. In his own “separate concurrent Opinion” Arbitrator Orrego Vicuña indicated that Chile “ha[d] given important steps to satisfy the moral dimension of the human rights situations with which it has had to deal” and that “[t]his positive attitude ha[d] certainly a bearence on the determination of compensation for moral damages.” (UNRIAA, vol. XXV, p. 16). The Commission therefore seems to have taken into account the “positive attitude” of Chile since the regime change in 1990 by awarding less monetary compensation than it would have had otherwise.

Arguably, tribunals should not only take into account the “positive” attitude of States regarding foreign investors but also, quite logically, any other “negative” factors. Any particularly condemnable governmental actions toward a foreign investor could have a bearing on the quantification of the actual amount of compensation to be awarded for moral damages.

When awarding compensation for moral damages, a tribunal is therefore not only wiping out all the negative consequences of a wrongful act. It is also sometimes expressing its strong concerns about a State’s unacceptable treatment of foreign investors, a concern which can be expressed in monetary terms. In such a case, the amount of compensation is not only attributed to remediate damage but also to send a clear message to the host State. There are several earlier examples of international law cases where arbitral tribunals have awarded monetary compensation in circumstances akin to moral damages with the clear intent of condemning unacceptable State conducts (see, Moke v. Mexico, U.S.-Mexico Mixed Claims Commission, 1871, in J.B. Moore, History and Digest of the International Arbitrations, Vol. IV, 1898, p. 4311).

In my view, a tribunal expressing strong concerns about State actions through an award of compensation to remediate moral damages must be distinguished from the notion of punitive damages. The concept of punitive damages is not recognized under international law (I.L.C. Commentaries, p. 243). Investor-State arbitral tribunals have also refused to award punitive damages (see, CMS v. Argentina, at para. 404). On the one hand, a State is not being imposed an extra amount of compensation in addition to the actual damages suffered. The amount of compensation awarded is in fact equivalent to the actual damage. On the other hand, the goal of awarding compensation still remains to remediate the actual damage suffered; it is clearly not to punish the host State. It may be that the concept of “aggravated” damages would in fact be a better term to describe this situation.

This contribution addresses another interesting question: what is the proper form of reparation to remediate moral damages suffered by a State (and not a foreign investor). This issue was discussed for the first time in the context of investor-State disputes in two separate awards both rendered in 2009.

The first case (Europe Cement Investment & Trade S.A. v. Turkey, ICSID Case No. ARB(AF)/07/2, Award, 13 August 2009) involved, a Polish company, which commenced arbitration proceedings against Turkey under the Energy Charter Treaty alleging its termination of concession agreements granted to two Turkish electricity corporations of which Europe Cement purported to be a shareholder. The Tribunal declined jurisdiction over the dispute based on the claimant’s inability to prove its ownership of shares in the corporations and further stated that the proceedings constituted an “abuse of process” by the claimant. The second case (Cementownia “Nowa Huta” S.A. v. Turkey, ICSID Case No. ARB(AF)/06/2, Award, 17 September 2009) also involved a Polish company commencing arbitration proceedings against Turkey under the same Treaty and under the exact same circumstances and breaches allegations. The Tribunal also declined jurisdiction over the dispute for the same reasons and added that this was a fraudulent claim.

In the Europe Cement case, Turkey submitted a counterclaim seeking compensation in the amount of US$1 million for moral damages it allegedly suffered to its “reputation and international standing” as a result of the “jurisdictionally baseless claim asserted in bad faith and for an improper purpose” which caused it “intangible but no less real loss.” (see, para. 118 & 177). A similar moral damages claim was also submitted by Turkey in the Cementownia case.

Both tribunals refused to award any compensation for moral damages, but based on different reasons.

The Europe Cement Tribunal noted that it was a “difficult question” to determine whether a conduct involving fraud “warrant[ed] an award of damages” (para. 181). In any event, the Tribunal held that such an inquiry was not necessary because “it [did] not consider that exceptional circumstances such as physical duress [were] present in this case to justify moral damages” (para. 181). The Tribunal therefore rejected the claim essentially based on lack of evidence.

The Cementownia Tribunal first noted that “there is nothing in the ICSID Convention, Arbitration Rules and Additional Facility which prevents an arbitral tribunal from granting moral damages” (para. 169). However, the Tribunal distinguished the present claim where the request for moral damages was “based merely on a general principle, i.e., abuse of process” from the Desert Line award where the claim was based on obligations contained in a BIT (para. 170). For the Tribunal, “it is doubtful that such a general principle may constitute a sufficient legal basis for granting compensation for moral damages” (Id.). The Tribunal therefore dismissed Turkey’s request because the Treaty did not provide any legal basis for awarding compensation for moral damages suffered by a State party.

More interestingly for the purpose of this contribution, the Europe Cement Tribunal added that any “potential reputational damage” suffered by Turkey would be “remedied by the reasoning and conclusions set out in this Award, including an award of costs” and that such an award would provide it “a form of ‘satisfaction’” (para. 181). In this case, although Turkey did formally claimed monetary compensation for the moral damages it suffered, it also added that such an award would, in any event, most likely take the form of “satisfaction” since the award would probably never be paid by the investor. The Tribunal ordered the Claimant to pay for the full costs of the proceedings (some US$3.9 millions) as well as half the arbitration costs (US$129,000). For the Tribunal, such an award of full costs in favour of the Respondent “will go some way towards compensating [it] for having to defend a claim that had no jurisdictional basis and discourage others from pursuing such unmeritorious claims” (para. 185).

In the Cementownia case, Turkey first argued that “tribunals applying international law may award to a State the remedy of satisfaction where it has suffered an intangible injury, such as injury to its reputation or prestige”, but then also added that “in investment treaty cases, compensation has been awarded where the injury was inflicted maliciously” (para. 165). Turkey therefore contended that in some circumstances monetary compensation could be the proper remedy for moral damages suffered by a State. The Tribunal noted that although “a symbolic compensation for moral damages” could show its condemnation of the abuse of process, in the present case, however, it was more appropriate “to sanction the Claimant with respect to the allocation of costs” (in the amount of close to US$5 millions). The Tribunal also declared that in any event a mere declaration would be a proper form of reparation to Turkey: “In any case, since the Arbitral Tribunal has already accepted the Respondent’s request with respect to the fraudulent claim declaration, the Respondent’s objective is already achieved” (para. 171).

Both awards confirm the principle set out in the work of the I.L.C. on State responsibility that the proper remedy for moral damages suffered by a State is, as a matter of principle, satisfaction and not monetary compensation. It is true that in both cases, the tribunals did make an award of costs in favour of Turkey, but this was simply because the alleged moral damages resulted from misconduct taking place during the arbitration proceedings. The allocation of costs on the party in bad faith is one form of sanction that can be used by a tribunal to deal with such abuse of process.

According to the I.L.C. satisfaction is the appropriate remedy for “those injuries, not financially assessable, which amount to an affront to the State.” (see, J. Crawford, I.L.C.’s Articles on State Responsibility, Introduction, Text and Commentaries, p. 231). Satisfaction is, indeed, the normal remedy for moral damages suffered by a State in the context of State-to-State disputes (see, for instance, Affaire du Manouba (France v. Italy), 1913, “Affaire du Carthage (France v. Italy), 1913, etc.). One may think, for instance, of insults to State symbols, such as the national flag, or to violation of territorial integrity, the premises of embassies and consulates, attacks on ships and aircrafts, attacks on heads of State or diplomatic and consular representatives, etc. There are very few cases where a moral damage to a State itself (as opposed to one of its nationals) has been remedied by monetary compensation and not by satisfaction. One famous example is the S.S. “I’m Alone” (Canada v. United States). Another one where an injury was remedied by both satisfaction and monetary compensation is the Rainbow Warrior arbitration between France and New Zealand.

The two ICSID cases just examined therefore confirm that in the context of investor-State disputes the proper remedy for moral damages suffered by a State is also satisfaction and not monetary compensation. In fact, this seems to be the only option available for tribunals settling disputes arising under investment treaties. These treaties essentially provide foreign investors with unprecedented substantive and procedural legal protection when they invest abroad. They typically do not provide any legal protection for the host State against the actions of investors. In this context, a mere declaration by a tribunal condemning an investor for wrongdoing seems to be the most States can truly hope for.

Patrick Dumberry
Assistant Professor
University of Ottawa (Civil Law section)

There is no doubt that the content of contemporary customary international law has been shaped by the numerous BITs entered into by States as acknowledged by tribunals in cases such as CME Czech Republic B.V. v. Czech Republic (UNCITRAL, Award, 14 March 2003, para. 498) and Mondev v. United States (ICSID, Award, 11 October 2002, para. 125). However, while it is certainly true that BITs will influence the development of customary international law, it is quite another thing to simply say that BITs now represent the new custom in international investment law. The better view is that custom in the field of international investment law does not correspond to the total sum of more than 2,500 BITs. In this respect, the approach was adopted by the Pope & Talbot Tribunal must be rejected (UNCITRAL, Award, 31 May 2002, para. 62: “applying the ordinary rules for determining the content of custom in international law, one must conclude that the practice of States is now represented by those treaties [i.e. BITs].”).

The main weakness of the proposition equalling BITs to new custom is its basic failure to meet the definition of customary international law. Custom has two constitutive elements: a “constant and uniform” (but not necessarily unanimous) practice of States in their international relations and the belief that such practice is required by law (opinio juris).

State practice. In theory, BITs can serve as evidence of the element of State practice required to establish the existence of a rule of customary international law (see, Camuzzi v. Argentina, ICSID, Award, 11 May 2005, para. 144). At the same time, as explained by the recent work of the International Law Association (ILA) on customary international law “[t]here is no presumption that a succession of similar treaty provisions gives rise to a new customary rule with the same content.” (p. 47). The undeniable reality is that BITs are very diverse in their content and scope. They are certainly not consistent enough to constitute the basis for any rule of customary international law. For instance, the inconsistency of State practice is undeniable with respect to the type and scope of legal protection offered to different types of shareholders (minority, indirect) as well as for holding (or “shell”) companies (see: T. Gazzini, “The Role of Customary International Law in the Protection of Foreign Investment”, 8(5) Journal of World Investment & Trade, 2007, at p. 707-710). This is also the position held by many authors in doctrine who have undertaken the analysis of BITs to determine whether specific substantive rights contained in these treaties represent custom (see: M. Sornarajah, The International Law on Foreign Investment, 2nd ed., Cambridge U.P., 2004, p. 206, 220-227, 436, 441-443 ; B. Kishoiyian, “The Utility of Bilateral Investment Treaties in the Formulation of Customary International Law”, 14(2) Northwestern Journal of International Law & Business, 1994, at p. 343-346, 363-373; A. Al Faruque, “Creating Customary International Law Through Bilateral Investment Treaties: A Critical Appraisal”, 44 Indian J. Int’l L., 2004, at p. 304-305, 356-363).

Opinio juris. As explained by the Tribunal in UPS v. Canada, there is no evidence of any “general sense of obligation” by States entering into BITs (UNCITRAL, Award, 22 November 2002, para. 97). In fact, the evidence suggests that the decision of States to enter into BITs is solely based on their (perceived) economic interest. Clearly, developing States sign BITs to attract foreign investments. BITs are the result of trade-offs and mutual concessions between States. Their content depends on the political and economic bargaining power of each party to the negotiations. BITs are the product of a compromise between conflicting interests; they are not entered into by States based on any perceived legal obligation.

It is noteworthy that the proposition that customary law is coterminous with BITs has been explicitly rejected by States. This is clearly the case in the context of NAFTA arbitration where unambiguous statements to that effect have been made by Mexico (submission filed in the context of Loewen v. United States, para. 33 & 39), by the United States (submission filed in: Glamis v. United States, p. 142 et seq.) and by Canada (submissions filed in: Chemtura v. Canada, at para. 269-273, and in: Loewen v. United States, at para. 18).

In sum, the content of custom and the thousands of BITs are simply not the same. Does this mean, as recently concluded by the ADM v. Mexico Tribunal (ICSID, Award, 21 November 2007, para. 117) that BITs only create lex specialis rules solely applicable between the countries which are party to these BITs? conclusion is not entirely satisfactory either, as it wrongly excludes the role that these treaties might play in the development of custom. Thus, these numerous BITs will necessarily influence customary international law.

The impact of BITs on customary international law is twofold. First, some of the standards of protection systematically contained in BITs will certainly contribute to the consolidation of already existing rules of custom in international investment law (see Generation Ukraine v. Ukraine, ICSID, Award, 16 September 2003, para. 11.3). Second, the common features to investment protection resulting from BITs will also contribute to the crystallisation of new rules of customary international law in the future. By their very nature, customary rules evolve over time. The repetitive enunciation of some of the standards of protection existing under BITs may be the starting point of State practice which will eventually become custom. A treaty provision may, indeed, provide the impulse for the formation of new custom.

Patrick Dumberry
Assistant Professor
University of Ottawa (Civil Law Section)

Is this right? Can a State successfully claim the status of persistent objector in investor-State arbitral proceedings to prevent the application of a specific rule of customary international law to its conduct?

The argument was for the first time raised in the recent 2007 case of BG Group v. Argentina. BG Group Plc (BG), a U.K. company, commenced arbitration proceedings alleging that measures taken by Argentina in the context of its financial crisis were contrary to the U.K.-Argentina BIT. In defence, Argentina invoked the state of necessity doctrine to exclude its international responsibility under both the BIT and custom as codified in Article 25 of the ILC’s Articles on State Responsibility.

The Claimant objected to this argument on the ground that the ILC Articles were a “non-binding codification of customary international law” and that, in any event, the United Kingdom had been “formally opposed to the inclusion by the ILC of a provision on ‘necessity’” and was, therefore, a persistent objector to any such alleged principle of necessity under custom (Award, para 400). The Tribunal held that Argentina could not invoke the doctrine of necessity under customary international law to excuse its liability under the BIT and that even if it were to apply Article 25 of the ILC Articles, Argentina would not have met the restrictive conditions for its application. The Tribunal did not further discuss the persistent objector argument.

The very existence of the concept of persistent objector is controversial in general international law. This is because, as a matter of principle, a rule that has already crystallised to become customary international law is binding upon all States. No State is allowed to opt out unilaterally. The persistent objector theory would allow for an exemption: when a State objected to a rule in the early stage of its formation and actively, unambiguously and persistently maintain such an objection thereafter. The concept of persistent objector has been criticised by several leading scholars. They argue that judicial findings in support of the concept of persistent objector do not represent the strongest authorities and that actual State practice does not support its existence.

I submit that there are other fundamental reasons specific to international investment law why an arbitral tribunal should reject a persistent objector defence. This analysis is based on the “test” adopted by Professor Schachter in his General Course to determine when the status of persistent objector may be permissible:

“It would be germane to consider a variety of factors including the circumstances of adoption of the new principles, the reasons for its importance to the generality of States, the grounds for dissent, and the relevant position of the dissenting States. The degree to which new customary rules many be imposed on recalcitrant States will depend, and should depend, on the whole set of relevant circumstances.”
These three criteria will be now briefly examined.

First, what are the circumstances of the adoption of customary rules? Some authors argue that custom rules have been imposed on developing States which have always rejected them (Sornarajah, p. 92-93). The better view is that while these rules may be “Western” in origin, they are not strictly “Western” in nature; they are truly universal. The fact that developing States are now signing BITs which typically contain the type of provisions they have historically rejected (such as the “Hull formula” on compensation for expropriation) clearly undermines the claim that customary rules have been imposed upon them. Moreover, recent empirical studies show that the same types of provision have also found their way in recent BITs entered into between developing States themselves. Thus, the content of these “South-South” BITs (representing 26% of the total number of BITs in 2008 according to UNCTAD, Recent Developments in International Investment Agreements (2007-June 2008) is therefore not significantly different from those other treaties entered into by developing States with developed States (UNCTAD, South-South Cooperation in International Investment Arrangements, p. 45). Since these rules represent universally-recognised values and are not biased against developing States, there are no reasons why any State should be allowed to opt out unilaterally from them.

Second, why are these customary rules so important in international investment law? The few existing rules which can be said to have crystallised to the rank of customary law in investor-State arbitration are important because they represent the last bastion of international legal protection against unlawful conduct by States. This is because custom is the residual applicable legal regime between a foreign investor and the host State in the absence of any BIT. These rules can therefore be invoked by any foreign investor in any country. To allow a State the benefit of the status of persistent objector would means, in practical terms, that there would simply be no minimum standard existing for the protection of foreign investors in that country. The coherence of the system of international investment law requires that a set of basic legal protections be applicable to any foreign investors at all time. This strongly militates against allowing any State the status of persistent objector to be able to opt out from such basic requirements that must be binding on all states.

Third, what could be the grounds for dissent of a State seeking the status of persistent objector? One can hardly think of any reasons persuasive enough to prevent the application of, for instance, the requirement for the host State to provide foreign investors with the minimum standard of treatment under international law. There is simply no reason why an arbitral tribunal should reward a “free rider” on the entire international legal order. The objector would, indeed, not provide certain very basic legal protections to foreign investors while expecting that its own nationals and companies doing business abroad be accorded that standard of protection by all other States.

In conclusion, for all these reasons I believe that to allow a State to claim the status of persistent objector would not be beneficial to the international community and to the further development of international investment law.

Patrick Dumberry
Assistant Professor
University of Ottawa (Civil Law section)