Crippling Compensation in the Law of State Responsibility

Is there an exception to the principle of full reparation in international law of State responsibility for cases where full compensation is ‘crippling’ for the responsible State or its peoples (to use the terminology of the International Law Commission (‘ILC’))? In the recent oral proceedings in the Armed Activities on the Territory of the Congo (DRC v Uganda) case before the International Court of Justice (ICJ), discussed further below, parties took opposite views on the question. However, for most of the history of international law, the ‘determin[ation of] the amount of compensation due for an act contrary to international law’ was carried out through the lens of examining ‘the consequences of the illegal act’. Such a perspective did not call for consideration of the capacity of the responsible actor to pay but this was not particularly concerning. Indeed, just a decade ago a piece co-authored by the leading contemporary author on State responsibility noted that burdens resulting from compensation awards by international tribunals were normally trivial when set against the total resources of the State, and unlikely to have a noticeable impact on the public treasury or on the ordinary taxpayer. The 2001 International Law Commission’s (‘ILC’) Articles on responsibility of States for internationally wrongful acts (‘2001 ILC Articles’) also reflect this perspective, drafting two forms of reparation – restitution and satisfaction – with explicit safeguards against excessiveness (respectively Articles 35(a)(b) and 37(3)), but choosing to provide no comparable qualification for cases of crippling compensation (Article 34 Commentary 5; Article 36).

The situation has, however, changed in recent years, and in a recent article I  revisit the question of whether the capacity of the State to satisfy the obligation to pay full compensation is a legally relevant consideration for determination of the content of responsibility. Tribunals in various fields of international law have granted compensation awards against States for more than USD 1 billion. Many decisions arise in investor-State arbitration. Last month, the French Cour de Cassation reinstated a $1.6 billion damages award in Rusoro v Venezuela; the Cairn Industries v India tribunal awarded $1.2+ billion in damages last December; in 2019, the Tethyan Copper v Pakistan tribunal awarded $6 billion in damages and the ConocoPhillips v Venezuela $8+ billion in damages; and in 2018 the Unión Fenosa Gas v Egypt awarded $2 billion in damages. And news items about $1+ billion investor-State arbitration claims being planned, launched, defended, set aside, rejected (II), or settled (II) have become routine in 2021. But very high awards of compensation are not limited to investor-State arbitration. In regional setting, executions of judgments of the European Court of Human Rights (ECtHR) concluded in recent years have required allocation of EUR 0.25 billion and EUR 1.2 billion. Claims of similar magnitude are also possible in inter‐State disputes, for example in pending cases against the United States in the Iran-United States Claims Tribunal (2016 US Digest 334), and in Armed Activities in the ICJ (CR 2021/11 78 [15]). For some of these States and their taxpayers, the amounts are not trivial: the July 2019 award against Pakistan was of a similar amount to its loan from the International Monetary Fund the same month, and in the pending Armed Activities case Uganda’s Agent described an order ‘to pay the approximately US$13.5 billion the DRC seeks’ as an ‘enormous … toll on the well-being of the Ugandan people’ since ‘about twice Uganda’s consolidated annual public spending would need to be transferred to the DRC’ (CR 2021/7 18 [28]).

The starting point for a discussion of the law of State responsibility in 2021 is the 2001 ILC Articles and their treatment in subsequent State and judicial practice. On the topic addressed in this post, Article 31 of the 2001 ILC Articles provides, reflecting custom, that ‘[t]he responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act’ (Enrica Lexie [1082]). Again under custom, full reparation may take the form of restitution, compensation, and satisfaction ([1082]). Commentary 5 to Article 34, which sets out forms of reparation, squarely addresses the concern ‘that the principle of full reparation may lead to disproportionate and even crippling requirements so far as the responsible State is concerned’ and considers ‘whether the principle of proportionality should be articulated as an aspect of the obligation to make full reparation’. The response is that these concerns are already addressed for each form of reparation: for restitution and satisfaction by an explicit qualification of disproportionality and for compensation by exclusion of indirect and remote damage but, by necessary implication, not exclusion of crippling damage. The implication is confirmed by the drafting history. The first reading of the 2001 ILC Articles concluded in 1996 (‘1996 ILC Draft Articles’) did have a general rule against crippling reparation in Article 42(3), stating that reparation must not ‘result in depriving the population of a State of its own means of subsistence’ (and nodding in the Commentary 8 to ‘equitable considerations that might be taken into account in providing full reparation, particularly in cases involving an author State with limited financial resources’). However, the ILC in the second reading took a different approach, deleting Article 42(3) and accompanying Commentaries and instead addressing the issue in the more limited terms of Commentary 5 to Article 34 noted above.

What was the ILC’s rationale? The best argument, just as on most aspects of reparation, was made by the last Special rapporteur (now Judge) James Crawford in his Third report on State responsibility. For him, it was not obvious how a rule against crippling compensation of the Article 42(3) of the 1996 Draft Articles kind could apply in the context of the secondary obligation of reparation. As a factual matter, Crawford felt that the concern about crippling compensation was exaggerated – amounts in compensation since 1945 had been relatively small, cases of very large compensation exceptional, and States routinely settled greater amounts in sovereign debt than were ever granted in compensation. In legal terms, States could limit liability regimes for particular fields in the first place. Once a distinction was drawn between quantum and the mode of payment, payment could be addressed either by a delay via necessity as a circumstance precluding wrongfulness or rescheduling in line with the practice of international financial institutions ([38]-[42], [161]-[164]). Crawford’s position was in line with submissions by most States, predominantly from the developed world: the United States was concerned about abuse of any such exception (146), the United Kingdom about the uncertainty of its content (145), and Australia ([43]), France (145), Japan (108), and Israel ([60]) added brisker expressions of disapproval. The opposite view, with different emphases, was taken during the second reading by Chile ([24]), Czech Republic ([47]), and Germany (146), and during the first reading by Bahrain ([49]) and Italy ([3]).

How persuasive does the 2001 ILC Articles’ approach seem in 2021? With the benefit of hindsight, it may be queried on three points. First, the underlying assumptions about the usual nature of the size of compensation claims in international law are not entirely in line with subsequent developments in international dispute settlement. Recall that for Crawford, the 20^th century practice suggested that compensation claims were mostly modest; the exceptional large claims in cases of egregious and systemic breaches, coloured by recollection of the terrible mistakes of post‐World War One reparations, would be either not insisted upon, as after World War Two, or dealt with by sui generis mechanisms like the United Nations Compensation Commission (UNCC), attuned to their peculiarities (UNSC Res 687 (1991) [19]). However, in practice some States have pressed very large claims before general dispute settlement mechanisms: in addition to the Armed Activities case noted above, the Eritrea-Ethiopia Claims Commission (EECC) described claims by both States as ‘impos[ing] crippling burdens upon the economies and population’ (Damages Awards [22]). The other important development is the rise, within human rights and investment law, of economic injury claims by non‐State actors, who are generally not repeat players and therefore not inclined to indulge in system‐preserving generosity. Secondly, the alternative legal means discussed in the ILC are not obviously realistic. States may limit liability in particular primary rules but have not done so in cases with large claims. Circumstances precluding wrongfulness that could justify delay in payment, like necessity, may be available in principle, but the record of their successful invocation in the last 20 years is not particularly impressive. Finally, the permissibility of crippling compensation might not easily fit within the broader balance struck by modern dispute settlement practice. Consider, among other things, the technical aspects of determination of quantum by Discount Cash Flow valuation method and compound interest, treated in a lukewarm manner by the ILC (Article 36, Commentary 26; Article 38, Commentaries 8-9)  but endorsed by modern tribunals (Duzgit Integrity [212]), including with significant impact in the recent billion‐dollar awards noted in this post. This shift of balance to favour the injured actor may create a gap for a corresponding contrary principle to emerge in favour of the responsible actor.

Has the international legal process of the last two decades endorsed or rejected the permissibility of crippling compensation in the 2001 ILC Articles? As noted above, State practice relating to the ILC work was mixed, and while the consistency and (light) numerical advantage of States in support of permissibility of crippling compensation increased the weight of their practice, the regional and developmental diversity of States arguing for an exception supported their position. Importantly, however, none of the latter States objected to Commentary 5 of Article 34 when the 2001 ILC Articles were adopted in the second reading, as States left unpersuaded by the ILC’s approach often did (e.g. the 2001 US Digest 364-381). Two aspects of post-2001 practice may be relevant for discussing the contemporary position. First, the ILC’s elaboration of the content of responsibility of international organizations, with the even more obvious challenges for such actors to provide full compensation, indirectly raised the question about the background rule in State responsibility. The ILC chose to provide analogous rules (2011 Articles on responsibility of international organizations Article 31 Commentaries 3-4, Article 36 Commentary 4), and even the organizations concerned about possible exposure to compensation claims accepted, by implication, the position in the 2001 ILC Articles, and rather tried to distinguish themselves as qualitatively different actors due to the lack of taxation powers (161). Secondly, the dispute settlement practice is mostly unhelpful and does not raise the question of principle, while specialised institutions address it either directly in their foundational rules (UNCC [19]) or indirectly through execution procedures (ECtHR). The EECC did express concerns in 2009 about the magnitude of both States’ damages claims and would have been ready to cap compensation to enable them to comply with their human rights obligations ([18]-[23]). On the other hand, the (in)capacity of the State has not been considered on the merits in any of the billion-dollar-plus investment arbitration cases referred to above. Finally, after the opening of oral proceeding in the Armed Activities case, parties’ written pleading were released, showing that Uganda had relied on the EECC’s argument against crippling compensation in its written pleadings (2016 Memorial Chapter 2.E, 2018 Counter-memorial Chapters 1.III  and 4.IV). Parties also addressed the issue in the oral pleadings in late April, with criticism of crippling compensation in Uganda’s Agent’s opening remarks (CR 2021/7 [24]-[28] (Byaruhanga)) challenged by the DRC (CR 2021/11 13 [6]-[7] (Forteau), 28 [29]-[30] (Sands)), which was challenged in turn by Uganda (CR 2021/12 67 [24(4)], [26] (Pellet)) (by reference to the article summarised in this post (67 fn 287)).  

Where does that leave the modern law of State responsibility? In my view, there are four possible answers.

• First, as per the Oppenheim’s International Law (9^th ed), perhaps there is no particular challenge at all and quantum simply throws the legal shadow on negotiations: ‘If a state literally does not have, and cannot borrow, the sums necessary, those facts will have to be taken into account in arriving at a political solution’ (532 fn 16).
• Secondly, crippling compensation can be considered within the existing rules, under the rubrics of circumstances precluding wrongfulness, general rules on content of responsibility (loss, causality, and valuation), and perhaps enforcement (ConocoPhillips v Venezuela Stay of Enforcement [54]).
• Thirdly, the possibility of crippling compensation can be addressed by treaty drafters, calibrating scope and content of primary rules (including by limitation-of-liability clauses), introduction of special secondary rules, or tweaking the tertiary rules on dispute settlement and associated enforcement.

Fourthly and finally, an exception to crippling compensation could be articulated at the level of customary secondary rules. In a technical sense, that would require identifying or generating (new) general practice that is accepted as law (opinio juris). One setting would be litigation of individual disputes, where challenges to crippling compensation could be presented, by respondent States as well as, when permitted by dispute settlement rules, non-disputing States or other actors. The topic could also be raised in international institutions, both regional and universal in character, including the UN General Assembly’s Sixth Committee. It is important to acknowledge, at the same time, the hard questions about the content of the purported exception at the level of general secondary rules as well as the procedural and evidentiary practicalities of its application in the still largely decentralised international legal order. Even those concerned about crippling compensation may well conclude that the micro‐case‐by‐case approach is the better way to proceed in framing a rule that could do justice to policies raised by both ConocoPhillips and Armed Activities. On balance, perhaps a narrow exception to crippling compensation could go with the grain of the modern and increasingly multilateral law of State responsibility, its vaguer contours elaborated in State, institutional, and judicial practice. Contribution to injury is a somewhat analogous recent example of how a responsible actor-favourable vague principle may be shaped by international dispute settlement (e.g. Copper Mesa v Ecuador [6.91]-[6.96]; Duzgit Integrity [198]-[199]; (DS)2 c Madagascar [460]-[462]). Ultimately, whatever the approach that international law adopts to crippling compensation, what is important is a reflection by the relevant actors on the best way to translate the balance struck in the 2001 ILC Articles into the somewhat different international legal order of 2021. It remains to be seen whether these issues will be addressed by the ICJ or Judges in their separate opinions in the Armed Activities case, the rare instance where the Court will have an opportunity to pronounce on broader issues of content of State responsibility.