The Articles on Responsibility of States for Internationally Wrongful Acts and the making of international investment law

In modern international law, the relationship between state responsibility and the protection of foreigners and their property is one of cross-fertilization and even common origin. When in 1924 the League of Nations commenced its efforts to codify international law, state responsibility was included as one of the subjects for potential international regulation. It was referred to as the ‘Responsibility of States for Damage done in their Territories to the Person or Property of Foreigners’ (document C.46.M.23.1926.V). In his first report of 1956, at the beginning of the ILC’s own work on state responsibility, García Amador referred to the issue of damage to the person or property of foreigners as the ‘principal subject of the literature, private and official codifications and judicial decisions which treat of the responsibility of States’ (at 181). Ago himself spoke of the initial ‘confusion of the two subjects’ (ILC Yearbook, 1969, vol. I, p 105).

For the last 20 years, ARSIWA has been part of the everyday workings of investment tribunals. International investment agreements (IIAs), particularly BITs concluded between the 1980s and early 2000s, have few if any provisions directly governing the conditions for and consequences of a breach of the treaty. Thus, reference to ARSIWA was arguably necessary for the resolution of investment disputes. With few exceptions (such as Bayindir v Pakistan, para 130), investment tribunals’ decisions show little or no reflection as to whether any adaptation of the rules in ARSIWA is needed to apply them to such disputes.

IIA claims involve a foreign investor and a state (or state entity), rather than a state-to-state dispute, and thus potential responsibility vis-à-vis private parties rather than another state. Further, by definition, IIA claims’ fundamental basis is a treaty. Yet the object of these claims are investments in the territory of the host state, which typically entails close connections between the IIA claim and parties, assets, and claims subject to local law. Are the general rules in ARSIWA well-suited for the hybrid nature of IIA claims? In the absence of lex specialis in the applicable IIA, investment tribunals have rarely deviated from ARSIWA to resolve issues of state responsibility (for exceptions, see CPI v Mexico, paras 161-179; Cargill v Mexico, paras 420-430), even where the application of the general rules has been frequent, such as on attribution and reparation. However, the wealth of investment tribunal decisions discussing state responsibility concepts provides a basis for the development of more precise rules on specific aspects. For example, is it possible to develop general criteria on when a person or entity is exercising elements of governmental authority for the purposes of ARSIWA Article 5 (Mills)? Or as to which are the valuation techniques that render the most reliable results in assessing material damage?

This post focuses on two concepts of the law of state responsibility that have contributed significantly to the architecture of international investment law (IIL). First, the principle in ARSIWA Article 3 that ‘[t]he characterization of an act of a State as internationally wrongful is governed by international law’ and that ‘[s]uch characterization is not affected by the characterization of the same act as lawful by internal law’. Second, the ‘circumstances precluding wrongfulness’ provided for in ARSIWA and their relation to provisions in IIAs circumscribing the scope of the parties’ obligations. The treatment of these two concepts in IIL may hold lessons for general international law, not least as to the (possible) function of national law in state responsibility determinations and the nature and effect of circumstances precluding wrongfulness.

ARSIWA Article 3 and the contract-treaty distinction

ARSIWA Article 3 is a key provision that defines the role of international law and national law in determining the lawfulness of state conduct. The ILC explained that Article 3 means that ‘the characterization of a given act as internationally wrongful is independent of its characterization as lawful under the internal law of the State concerned’ (Commentary, para 1). Yet it also noted that ‘in the fields of injury to aliens and their property and of human rights, the content and application of internal law will often be relevant to the question of international responsibility’, although this is because ‘either the provisions of internal law are relevant as facts in applying the applicable international standard’ or ‘they are actually incorporated in some form, conditionally or unconditionally, into that standard’ (ibid, para 7).

The ad hoc Committee in Vivendi I relied on the ‘general principle’ in Article 3 to distinguish between a breach of an IIA and a breach of contract. Claims deriving from each type of breach are subject to their own proper forum and applicable law (international law and the law of the contract respectively). Although the scope of the contract-treaty distinction has not yet been fully spelled out, it is one of the factors behind investment arbitration’s exponential growth. The reason is that it has largely prevented respondent states from effectively relying on contract or national law provisions to raise jurisdiction/admissibility and even merits defences. More generally, the principle in ARSIWA Article 3 and related ideas have been used to relegate national law to a secondary role in the resolution of investment disputes while speaking of the ‘independence’ of treaty claims.

This is an unwarranted application of the principle in Article 3, which may be attributed, first, to the fact that investment tribunals have arguably read too much into the Vivendi I annulment decision. This decision does not speak of the ‘independence’ of treaty claims but rather uses the concept of ‘fundamental basis’ (paras 100-101), which suggests a prominent yet not exclusive role of international law in treaty claims. The Vivendi I ad hoc Committee even acknowledged that ‘municipal law will often be relevant—in assessing whether there has been a breach of the treaty’ (para 101). Second, it must be recognized that in Vivendi I and even in the ILC’s materials there is a tension between, on the one hand, the broad statement that the characterization of an act of a state as internationally wrongful ‘is not affected’ by its characterization in national law and, on the other hand, the recognition of the potential relevance of national law ‘to the question of international responsibility’.

Yet, the primacy of international law may be preserved without denying a role for national law in the determination of international responsibility. In fact, the lawfulness of an act under national law may affect the assessment of whether the same act is internationally wrongful, particularly in fields such as IIL. For example, whether national law has been breached is often material in investment tribunals’ determinations of whether there has been a breach of the fair and equitable treatment standard. The ILC suggests that here national law is relevant as a fact or that it has been (implicitly) incorporated into the international standard. However, a more apt characterization is that determining international responsibility here requires a composite legal analysis, made up of elements of national and international law (with international law prevailing in case of conflict). National law may not be used to justify a breach of international law, which ultimately (but not necessarily exclusively) governs state responsibility.

Defences under investment treaties and circumstances precluding wrongfulness

Respondent states have relied on both IIA provisions and circumstances precluding wrongfulness as shields against investment claims. In considering the IIA provisions used as defences by states, investment tribunals have struggled particularly with determining the precise relationship between so-called non-precluded measures provisions (NPMs), such as Article XI of the Argentina-US BIT, and circumstances precluding wrongfulness. The CMS case, where Argentina raised defences based on Article XI and the state of necessity under ARSIWA Article 25, serves to illustrate investment tribunals’ evolving views on that relationship.

The CMS Tribunal treated Article XI and the state of necessity under Article 25 as essentially the same necessity plea, albeit under treaty and customary law respectively (paras 304-394). Accordingly, leaving aside specific aspects of Article XI such as whether it was self-judging (paras 366-374), the NPM provision and the state of necessity were apparently subject to the same requirements.

The CMS Annulment Committee’s view was fundamentally different (and the one that eventually prevailed in investment arbitration jurisprudence). According to the Committee, ‘Article XI specifies the conditions under which the Treaty may be applied’ and ‘is a threshold requirement: if it applies, the substantive obligations under the Treaty do not apply’ (para 129). Conversely, ‘Article 25 is an excuse which is only relevant once it has been decided that there has otherwise been a breach of those substantive obligations’ (para 129). The Committee left open the issue ‘whether state of necessity in customary international law goes to the issue of wrongfulness or that of responsibility’ (para 132), yet it was clear that if Article XI applied, no breach of the Treaty had occurred (para 133).

This is the crucial point. NPMs and other defences based on a provision of the IIA define the scope of the obligations assumed by the states parties, in the same way as the rest of the provisions of the IIA (unless otherwise stated). The precise way in which the substantive IIA provisions (including NPMs) interact inevitably depends on the interpretation of each treaty. But if the interpretation leads to the application of a treaty-based defence, there is no incompatibility with the treaty and thus no reason to even consider whether reparation is due: at a conceptual level, not even a prima facie breach would exist. Otherwise, one would be interpreting treaty provisions in isolation, when in fact everything should be ‘thrown into the crucible’. However, if a circumstance precluding wrongfulness applies, both in the case of justifications and excuses, there exists an act that is prima facie a breach of the treaty, which is then rendered lawful by a defence external to the IIA. The act is thus not wrongful, but this prima facie breach allows for the application of ARSIWA Article 27 and the consideration of whether, in the circumstances, compensation for any material loss is due.

Conclusion

ARSIWA and IIL have common ancestors and, although they eventually grew apart, have continued to influence each other. On the one hand, investment tribunals have relied on ARSIWA Article 3 to affirm the primacy of treaty obligations. However, they have probably gone too far in downgrading national law, particularly given its necessary role in regulating national and foreign investments alike. On the other hand, investment tribunals eventually correctly distinguished between treaty defences and circumstances precluding wrongfulness. There is however still a need to further develop international law rules on the latter circumstances. The distinction between justifications and excuses could, for example, determine whether or not reparation is due (and whether a prima facie breach is justified or excused could hinge on the facts of each case rather than on abstract legal concepts). Be that as it may, what is clear is that IIL, as the most prolific source of decisions touching on state responsibility, will influence the future development of the principles contained in ARSIWA.

Note: I thank Adelaida Torres Rovi for excellent research assistance.