The Arbitration of Disputes Related to Foreign Investments Affected by Unilateral Sanctions

© T.M.C. Asser Press and the author(s) 2015
Ali Z. Marossi and Marisa R. Bassett (eds.)Economic Sanctions under International Law10.1007/978-94-6265-051-0_11

11. The Arbitration of Disputes Related to Foreign Investments Affected by Unilateral Sanctions

Pierre-Emmanuel Dupont 

London Centre of International Law Practice, 259–269, Winchester House, Old Marylebone Road, NW1 5RA London, UK



Pierre-Emmanuel Dupont


This chapter argues that in some cases, there may be a reasonable chance of success for those companies targeted by unilateral sanctions to prevail in an investor-State arbitration against a targeting State where the companies are in a position to rely on a BIT in force between their home country and this State. The chapter begins with a consideration of the jurisdictional basis of claims for damages suffered by investments. It emphasizes that affected companies considering such an option shall first assess the likelihood of an arbitral tribunal’s determination that such company has actually made an investment in the targeting State. The chapter then turns to the standards of investment protection found in BITs that could be invoked in cases of application of unilateral sanctions. It is submitted that the prohibition of expropriation is prima facie the most relevant but that other standards of investment protection such as fair and equitable treatment, full protection and security, and the prohibition of unreasonable and discriminatory measures, may at times come into play. It finally examines the probable defenses that a respondent State faced with such a claim would likely raise. These arguments could be based either on the law of countermeasures or on specific provisions in BITs such as clauses on ‘essential security interests’ and ‘non-precluded measures’ or, in the case of EU measures, on the principle of primacy of EU law. The author argues that none of these lines of argument could operate as to exclude ipso facto the international responsibility of the targeting State.

The author wishes to thank Judge Koorosh H. Ameli for his comments on an earlier version of this chapter, and Ms. Clémence de Bodman for her advice. All errors and omissions remain the author’s.

11.1 Introduction

In his report Unilateral Economic Measures as a Means of Political and Economic Coercion against Developing Countries, submitted to the 68th Session of the UNGA in 2013, the UN Secretary-General pointed to the fact that unilateral measures, especially broad trade embargoes, can have “severe adverse consequences for human rights, people’s welfare, and the long-term growth prospects of the affected country.”1 Apart from these effects at the macroeconomic level, it is clear that individual companies subject to unilateral sanctions (be they subject to ‘smart sanctions’ or affected by a broad trade embargo) may be substantially affected by the adverse effects of the measures on the conduct of their business, in particular the forced termination of commercial or investment contracts. It may indeed reasonably be assumed that upon entry into force of the unilateral measures, contracts concerned with the subject matter of the sanctions, entered into between affected companies and counterparties, which are nationals of the targeting State, and governed by the law of the targeting State, become illegal under this law.2 It may also be assumed that the contracts, being null on the grounds of illegality, cannot give rise to a claim for performance or damages.3

Alternatively, it is also likely that the counterparty may be excused from rendering performance due to a legal impediment, on the ground of force majeure.4 It is quite undisputed in doctrine5 as well as in judicial and arbitral case law that governmental interference in international business relations under the form of an embargo may justify a force majeure defense for a debtor.6 Unilateral sanctions may be deemed to entail effects similar to those of an embargo, in that respect. It is also admitted that “normally acts of public authority by the State have to be accepted as an excusing case of force majeure.”7 It seems well established that on the basis of sanctions measures, courts and tribunals, whether judicial or arbitral, may thus nullify or terminate contracts or justify their nonperformance.

This has been emphasized, for example, with respect to the measures taken by the UN and the EC during the 1990–1991 Gulf crisis, during which an arbitral tribunal justified the nonperformance of certain contracts signed with Iraqi parties.8 Be that as it may, the affected companies may try to apply before various fora in order to find means of redress or compensation for the damages they incurred. They may first apply before national courts of States whose governments have enacted such measures. They may also consider bringing a claim before a (commercial) arbitral tribunal, pursuant to dispute settlement provisions found in the affected contracts. However, it is highly unlikely that the tribunal would allow the party affected by the sanctions to obtain any compensation.9 Another opportunity may be considered in some cases: affected companies could initiate ‘investor-State’ international arbitration proceedings under BITs on the protection of foreign investments.

The present chapter argues that in some cases, there may exist a reasonable chance of success for those companies targeted by unilateral sanctions to prevail in an investor-State arbitration against a targeting State where the companies are in a position to rely on a BIT in force between their home country and this State. The chapter begins with a consideration of the jurisdictional basis of claims for damages suffered by investments (Section 11.2). The next section (Section 11.3) will turn to the assessment of the standards of investment protection found in most BITs that could be the most relevant in cases of application of unilateral sanctions. Then it considers the probable defenses that a State faced with such a claim would likely raise (Section 11.4) and sets out conclusions (Section 11.5).

11.2 The Jurisdictional Basis for Investment Claims by Companies Affected by Unilateral Sanctions

Once a relevant BIT in force between the targeting State and the country of nationality of the affected company has been identified, the submission of a dispute related to unilateral measures between a State and a foreign investor to the jurisdiction of an arbitral tribunal established, for example, under the UNCITRAL, ICC or SCC rules, requires several conditions to be fulfilled regarding: (i) the parties to the dispute (jurisdiction ratione personae); (ii) the subject matter of the dispute (jurisdiction ratione materiae); and (iii) the existence of consent to arbitration. These conditions, which derive from the relevant BIT, will not be examined at length in the present chapter because they are the same as those applicable to the jurisdiction of any investment arbitration tribunal. Since many BITs include an option for ICSID arbitration, additional jurisdictional requirements found in the ICSID Convention10 may need to be taken into account. Only a few points that may be most relevant in the context of claims related to unilateral sanctions will be emphasized here as regards these jurisdictional requirements.

First, the existence of a legal dispute has to be established. BITs usually do not provide a definition of what constitutes a legal dispute. Arbitral tribunals most frequently refer to the jurisprudence of the ICJ, which defines a dispute as a “disagreement on a point of law or fact, a conflict of legal views or interests between parties.”11 In the case of unilateral measures, it seems very likely that any arbitral tribunal would satisfy itself that the dispute related to the consequences of the sanctions, brought by a targeted company against the targeting State, is a dispute of a legal nature.

Second, for an arbitral tribunal to assert its jurisdiction over a dispute related to unilateral sanctions, the dispute must be characterized as related to an ‘investment’ in the meaning of the relevant BIT. It can be foreseen that in most actual cases, given the economic sectors in which affected companies are active, the major jurisdictional issue will be whether the rights of the companies under the affected contracts (either direct rights or shareholding rights), qualify as ‘investments.’ This requirement of existence of an investment is to be examined: (i) with respect to the definition of ‘investment’ provided for in the relevant BITs; and (ii) if applicable, with respect to the notion of investment for the purposes of Article 25 of the ICSID Convention. As is well known, the issue of existence of an investment is one of the most controversial issues in investment arbitration case law, and this is particularly true with regard to the ICSID Convention.12 It is generally considered that the so-called Salini Test applies, i.e., that ICSID arbitral tribunals, in order to establish their jurisdiction, require that the ‘investment’ considered meets the following conditions or displays the following features: (i) a contribution; (ii) a certain duration; (iii) an element of risk; and (iv) a contribution to the host State’s economic development.13

As regards non-ICSID (e.g., UNCITRAL) arbitral tribunals, it appears that some of them would satisfy, for the purposes of establishing their own jurisdiction over a given dispute, that an ‘investment’ exists in the meaning of the relevant BIT. Thus, in O and L v. Slovakia, the UNCITRAL Tribunal concluded that:

since the Claimants’ investment meets the definition of investment under the BIT, it is sufficient for the Tribunal’s determination of an existence of an investment in the present case.14

But in other cases, non-ICSID tribunals look beyond the BIT definition of ‘investment,’ linking it to the requirements or ‘characteristics’ of an investment as these have been developed by arbitral tribunals in the context of ICSID arbitration. For example, in Romak v Uzbekistan, a dispute concerning a contract for the delivery of wheat, the UNCITRAL arbitral tribunal declined to accept as an investment “whatever the contracting States have decided to label as such in the treaty they have concluded.”15 The tribunal denied jurisdiction over the dispute on the ground that the disputed contractual rights did not constitute an investment under the applicable BIT.16 It endorsed the Salini Test (which will be referred to below) despite the fact that the applicable UNCITRAL Arbitration Rules do not contain a jurisdictional requirement equivalent to Article 25(1) of the ICSID Convention.17 Similarly, in Alps Finance and Trade AG v. Slovakia,18 a dispute regarding an alleged ‘investment’ consisting in the acquisition—by means of an assignment agreement—of receivables by a foreign investor from a private Slovak company, the Tribunal affirmed that:

234. In the practice of investment arbitrations, an investment was found to exist under the category of ‘claims or rights to money or to performance’ in the case of contracts for public works or infrastructures, or concessions of public services, or long-term loans or similar financing instruments, made by the investor with a State or State entities.

The object of the dispute was the alleged non-performance or defective performance of the contract obligations by the host-country or its own agencies. In such cases, the underlying contracts were long-term contracts having a significant importance for the economy of the host-State.

235. No such pre-requisite is satisfied by the Assignment Contract. The Claimant does not complain that it was entitled to any performance by the Republic of Slovakia under the Assignment Contract as such and that the Republic failed to perform it. On the contrary, the Republic was completely extraneous to the transaction and its economy received no benefit whatsoever therefrom.

236. According to Article 31(1) of the Vienna Convention, the treaty must be interpreted not only pursuant to its ‘ordinary meaning’, but also taking into account the general context, the object and the purpose of the treaty. As seen before, the object and purpose of the BIT, as reflected in its preamble, is to intensify the economic cooperation to the mutual benefit of both States and attract foreign investments with the aim to foster their economic prosperity. It is hard to see how the Assignment Contract might have contributed to either the mutual economic cooperation between States or to the growth of Slovak economic prosperity. It was rather a private, neutral, and speculative business, having no impact on the State economy.

237. The interpretative criterion set forth by Article 31(1) of the Vienna Convention must also apply to the terms of the list contained in Article 1(2) of the BIT. Doing otherwise would be inconsistent with the BIT-context and ignore its object and purpose. More than that, a merely literal application of category (c) of Article 1(2) would lead, in the present case, to what Article 32(2)(b) of the Vienna Convention defines as a ‘manifestly absurd or unreasonable result’, i.e., an outcome to be necessarily avoided.

238. Conclusively, even though Article 1(2) of the BIT provides for a very broad definition of the term ‘investment’, the Assignment Contract cannot be classified as an investment under the BIT and therefore the Tribunal lacks jurisdiction over the case.19

What is important to observe is that in any given case, affected companies (and their counsel) in a position to rely on a BIT in force between their home State and the targeting State shall assess whether there is uncertainty regarding an arbitral tribunal’s determination that the company has actually made an investment in the targeting State. A non-ICSID arbitral tribunal would have to satisfy itself that the given ‘investment’ made by the affected company in the targeting State meets the definition of the BIT (but maybe read in conjunction with the Salini criteria). And an ICSID tribunal would require that a given ‘investment’ cumulatively meets the definition of the applicable BIT and that of Article 25(1) of the ICSID Convention.

In any case, affected companies (and their counsel) shall endeavor to demonstrate that the said companies have actually made investments in the territory of the host State. For instance, if one considers the particular case of financial institutions subject to unilateral sanctions, these shall assert that they have engaged in banking activities in the targeting State, e.g., through the opening of local subsidiaries, the granting of loans, or the provision of other financial services, which would qualify as investments in the meaning of the relevant BITs. It may be noted in that respect that banking activities such as the provision of loans are an undisputed form of investment in the meaning of BITs, as well as in the meaning of Article 25(1) of the ICSID Convention, and that it is widely admitted that financial instruments such as loans or the purchase of bonds may qualify as investments.20

11.3 Relevant Standards of Investment Protection

11.3.1 Expropriation

It is generally accepted that, as a matter of customary international law, the legality of a measure of expropriation is subject to the following cumulative requirements (as are reflected in most treaties for the protection of investments):21

  • The measure must serve a public purpose. As noted by Schreuer, given the broad meaning of ‘public purpose,’ it is not surprising that this requirement has rarely been questioned by the foreign investor. However, tribunals have addressed the significance of the term and its limits in some cases.22

  • The measure must not be arbitrary and discriminatory within the generally accepted meaning of those terms.

  • Some treaties explicitly require that the procedure of expropriation must follow principles of due process. Due process is an expression of the minimum standard under customary international law and of the requirement of fair and equitable treatment.

  • The expropriatory measure must be accompanied by prompt, adequate, and effective compensation. Adequate compensation is generally understood today to be equivalent to the market value of the expropriated investment.

It is well established that expropriation may be indirect and that “certain types of measures affecting foreign property will be considered as expropriation, and require compensation, even though the owner retains the formal title.”23 Many BITs contain such a reference to indirect expropriation. When it comes to determining the existence of an indirect expropriation, what matters is the economic effect of the measure at issue on the benefit and value of the investment.24

In the case of unilateral sanctions, insofar as the enactment of the measure clearly has an adverse economic effect on the benefit and value of the rights of the affected companies under the contracts and other instruments through which they have made an investment in the targeting State, it may be reasonably argued that the measures concerned amounted to indirect expropriation and, in most cases, that such expropriation was not accompanied by prompt, adequate, and effective compensation.

11.3.2 Other Relevant Standards of Treatment

Prima facie and subject to further review of the nature and implications of the measures concerned, the following standards of investment protection may also be relevant, i.e., it may be reasonably argued that these have been breached by the targeting State through the enactment of the measures: (i) fair and equitable treatment; (ii) full protection and security; and (iii) the prohibition of unreasonable and discriminatory measures. Fair and Equitable Treatment

BITs often contain clauses granting fair and equitable treatment (FET) to foreign investments. As is well known, the FET standard assumes a considerable importance in most investor-State arbitrations.25 It is widely seen as an expression and part of the bona fide principle recognized in international law,26 although bad faith from the State is not required for its violation. The following definition, given by the Tribunal in the Tecmed v. Mexico case, is generally considered reflective of the general understanding of the concept of FET:

The Arbitral Tribunal considers that this provision of the Agreement, in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations … The foreign investor also expects the host State to act consistently, i.e., without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities. The investor also expects the State to use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments, and not to deprive the investor of its investment without the required compensation.27

In the case of unilateral sanctions, it may be reasonably argued that the enactment of the measures amounts to a violation of the FET standard. This is especially plausible given the lack of procedural guarantees provided in most sanctions cases to affected companies, which may be seen as a denial of due process.28 Full Protection and Security

Most BITs contain clauses granting protection and security to foreign investments. When such clauses are present, the host State is under an obligation to take active measures to protect the investment from adverse effects.29 These adverse effects may stem first from private parties such as demonstrators, employees, or business partners. Thus in Saluka v. Czech Republic, the Tribunal found that:

The ‘full protection and security’ standard applies essentially when the foreign investment has been affected by civil strife and physical violence. … [T]he ‘full security and protection’ clause is not meant to cover just any kind of impairment of an investor’s investment, but to protect more specifically the physical integrity of an investment against interference by use of force.30

It is generally considered that the adverse effects may also be the consequence of actions perpetrated by the host State itself and its organs (including its armed forces). The host State’s duty is not restricted to preventing damaging acts by private actors.31 Thus the applicability of a treaty provision on protection and security to direct attacks on the investor’s person and property by organs of the host State is beyond doubt. In Biwater Gauff v. Tanzania, for example, the Tribunal said:

The Arbitral Tribunal also does not consider that the ‘full security’ standard is limited to a State’s failure to prevent actions by third parties, but also extends to actions by organs and representatives of the State itself.32

What is potentially particularly relevant to the case of unilateral sanctions is that in some cases tribunals found that treaty provisions on full protection and security guaranteed legal security enabling the investor to pursue its rights effectively.33 As noted by Schreuer, “there is also authority indicating that the principle of full protection and security reaches beyond safeguard from physical violence and requires legal protection for the investor.”34

Several decisions of arbitral tribunals support the argument that the protection and security standard is not restricted to physical protection but extends to legal protection through domestic courts. In CME v. Czech Republic a regulatory authority had created a legal situation that enabled the investor’s local partner to terminate the contract on which the investment depended. The Tribunal applied the full protection and security BIT between the Czech Republic and the Netherlands and stated:

The Media Council’s actions in 1996 and its actions and inactions in 1999 were targeted to remove the security and legal protection of the Claimant’s investment in the Czech Republic. … The host State is obligated to ensure that neither by amendment of its laws nor by actions of its administrative bodies is the agreed and approved security and protection of the foreign investor’s investment withdrawn or devalued. This is not the case. The Respondent therefore is in breach of this obligation.35

Along the same line, in the Lauder v. Czech Republic case, which concerned the same set of facts, the Tribunal found that the full protection and security provision had not been violated because none of the actions or inactions of the Media Council had caused direct or indirect damage to the Claimant’s investment and the termination of the contract by the investor’s local business partner was not attributable to the host State. The Tribunal said:

The investment treaty created no duty of due diligence on the part of the Czech Republic to intervene in the dispute between the two companies over the nature of their legal relationships. The Respondent’s only duty under the Treaty was to keep its judicial system available for the Claimant and any entities he controls to bring their claims.36

Although the Tribunals in CME and Lauder reached different conclusions:

the differences are the consequence of diverse assessments of the facts. Both decisions indicate that the principle of protection and security is relevant to the protection of legal rights including the availability of a judicial system that protects the investor’s interests.37

Such considerations appear at first sight particularly relevant to some cases involving the imposition of unilateral sanctions, since by enacting the sanctions measures the targeting State creates a legal situation that enables the targeted company’s counterparty to terminate the contracts on which the company’s investment rests. Furthermore, in most instances, no opportunity for judicial review or procedural guarantee is offered to the targeted companies with respect to the sanctions measures. The Prohibition of Arbitrary and Discriminatory Measures

BITs most often contain provisions on the prohibition of arbitrary/unjustified and discriminatory measures visàvis foreign investments.38 This standard of investment protection is closely related to the concept of arbitrariness.39 It has been described in general terms by the Tribunal in LG&E v. Argentina in the following terms:

measures that affect the investments of nationals of the other Party without engaging in a rational decision-making process. Such process would include a consideration of the effect of a measure on foreign investments and a balance of the interests of the State with any burden imposed on such investments.40

In the case considered, it may be reasonably argued that the enactment of the contested sanctions measures amounted to a violation of the prohibition of arbitrary/unjustified and discriminatory measures. Again, the absence of due process guarantees in the context of the enactment of the measure can arguably be invoked as evidence of its arbitrariness.

11.4 Probable Defenses that a Respondent State May Raise

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