The Extraterritorial Application of the Fair and Equitable Standard: The 1955 US-Iran Treaty of Amity before the International Court of Justice

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In July 2018, Iran brought claims against the United States (US) before the International Court of Justice (ICJ). The former alleged breaches of certain treaty provisions of the 1955 Treaty of Amity, Economic Relations and Consular Right between the United States of America and Iran (1955 Treaty) because of the latter’s (re)imposition of sanctions in May 2018, pursuant to Washington’s withdrawal from the Joint Comprehensive Plan of Action. Among its claims, Iran contends that the US failed to accord Iranian nationals and Iranian companies fair and equitable treatment (FET), as mandated by Article IV(1) of the 1955 Treaty (para. 41 of the Application Instituting Proceedings).

Article IV(1) of the 1955 Treaty reads:

“Each […] Party shall at all times accord fair and equitable treatment to nationals and companies of the other […] Party, and to their property and enterprises; shall refrain from applying unreasonable or discriminatory measures that would impair their legally acquired rights and interests; and shall assure that their lawful contractual rights are afforded effective means of enforcement, in conformity with the applicable laws.”

One question which arises here, and which relates to a point that might be raised by the United States, as a defense, is whether the FET standard applies to US acts which affect targets not situated on US territory. As the fair and equitable treatment (FET) is a staple of modern-day investment agreements, this is a question that will be of interest to investment lawyers as well (for a relevant example of the latest developments of FET in contemporary investment treaties, see Article 8.10 of the Comprehensive and Economic Trade Agreement – CETA – between the European Union and Canada). Such agreements are, as a rule, limited to protecting the rights of investors situated on the territory of the host state (for example, Article 8.2(1) of the CETA).

This issue may appear to have been settled in 1996, when, the ICJ, in its Decision on preliminary objections in the Oil Platforms case, expressly rejected such a defense by the US. It found that Article IV(1) of the 1955 Treaty of Amity:

“does not include any territorial limitation. The general guarantee made available by paragraph 1 has, on that account, a wider scope than the particular obligations laid down by the other paragraphs.” (para. 35).

However, the issue was reopened by Judge Rosalyn Higgins, who, in her Separate Opinion to the Judgment on the merits in the same case, stated that:

“Article IV (1) clearly refers to the obligations of the United States to Iranian nationals, their property and their enterprises, within the territory of the United States; and vice versa.” (para. 39).

The question that the ICJ faces is whether to reverse its position to reflect that adopted by Judge Higgins in her separate opinion. In this post, I will argue that there are good reasons for the ICJ to follow its own precedent and not to adopt the position of Judge Higgins.

Examining Judge Higgins’ argument

Judge Higgins’ argument is based on a number fundamental premises, two of which are particularly relevant here. First, the duty to accord ‘fair and equitable treatment’ to nationals and companies is a term specific to the field of overseas investment protection. Second, the other clauses of Article IV support the geographical limitation.

I will begin with this last premise, which was dispelled by the ICJ in the Decision on preliminary objections in the Oil Platforms case. The Court considered that the other clauses and their geographical limitations actually reinforce the conclusion that no such limitation exists when it comes to Article IV(1) of the 1955 Treaty. For instance, other obligations stemming from the same treaty (such as the obligation to accord most constant protection and security to the property of the other party’s nationals and companies, for example) are actually expressly tied to the territory of the obligor. In other words, such treatment shall be accorded only on the territory of the US as regards the property of Iranian nationals and companies and vice versa. It was by reference to such a framework that the ICJ was essentially interpreting the provisions of Article IV(1) in their context, finding that the existence of territorial limitations as regards various other obligations reinforce the conclusion that fair and equitable treatment is not premised on a territorial nexus.

As regards the other premise, there is nothing wrong with Judge Higgins’ assertion, in abstracto. In this specific context, however, such an assertion cannot be accepted given the limits of the 1955 Treaty. More specifically, by looking at the preamble of the 1955 Treaty, it becomes apparent that this agreement is not focused exclusively on investment protection (even if such treaties of amity/friendship are considered precursors of investment instruments; see Kate Miles, The Origins of International Investment Law. Empire, Environment and the Safeguarding of Capital, Cambridge University Press 2013, at 24-25). The focus of the treaty is, in fact, on the ‘harmonious development of their [the parties’] commercial, financial and consular relations’, as found by the ICJ, again in the Oil Platforms case, in the Decision on preliminary objections (at para. 28). Investment relations require by definition a strong territorial link to the host state. Commercial and financial ones do not – at least not to the same extent as investment relations do. In this context, it does seem rather arbitrary to limit the protection of Article IV(1) to investment relations and to the territory of the state on which the duty to offer this protection is incumbent.

An evolutionary interpretation

Should any doubts still persist as to the application of the fair and equitable treatment to Iranian companies located in Iran, an evolutionary interpretation of the 1955 Treaty might dispel them. Such a form of interpretation is meant to take into account changing circumstances over time and consider them when constructing the meaning of a treaty or of one of its terms (at p. 465). To do this, however, it must be shown that the parties intended such an evolutionary approach to treaty interpretation. One way in which this can be assessed is by looking at the object and purpose of the treaty (at p. 473) and seeing if it is necessary (at pp. 475-476) to undertake an evolutionary interpretation so that the “application of the treaty […] would be effective in terms of its object and purpose” (at para. 80), in a given circumstance. In other words, it could be said that in such situations foregoing an evolutionary interpretation would defeat the object and purpose of the treaty which must be applied.

The object and purpose of the 1955 Treaty, as stated in its Preamble, relates to the desire of the parties to “encourag[e] mutually beneficial trade and investments and closer economic intercourse generally between their peoples […]” (at para. 57). As such, one must look at sanctions imposed by the US and see if their effects are not liable to defeat the object and purpose of the treaty. It is well known that such sanctions can have a multitude of severe effects (economic and social harm, it can affect governmental legitimacy etc.). In a very blunt manner, sanctions can ‘cripple’ the target state and/or its companies (for example, see here and here). Furthermore, these sanctions usually apply to companies operating outside the US, at least as concerns the Iranian sanctions (at paras. 21-28). One could hardly argue that the existence of sanctions is conducive to the development of harmonious economic relations as those envisioned by the object and purpose of the 1955 Treaty. In fact, the sanctions regime can undermine any business relationship between Iranian companies and American ones. This is clearly not what the parties wanted, if the intention is to be found in the object and purpose of the 1955 Treaty.

Although what was mentioned above shows that sanctions, by themselves, affect the object and purpose of the Treaty, the question remains why must an evolutionary interpretation be applied to Article IV(1) of the 1955 Treaty. The answer lies in the way economic relations and the use of international economic sanctions have evolved since 1955, the moment that the treaty was signed. At that moment the global interconnected world, with its current economic architecture was just beginning to take shape (for an account of how the global economic framework is the product of post-World War II arrangements, see here). It was hardly conceivable then what impact might sanctions have in such a world. It was equally hard to envision a world with a sole superpower having the ability to project power without the need to resort to military force in the way the US is able to do this now. Circumstances have changed, however and, as mentioned earlier, the current economic (and especially financial) architecture allows Washington to impose its sanctions upon another state in a severely damaging way. It is those changed circumstance which militate for an evolutionary interpretation of Article IV(1) of the 1955 Treaty, so as to cover the issue of sanctions. Otherwise, an effective means of countering the damaging effects of sanctions would be denied and the object and purpose of the Treaty of Amity would be defeated.

Furthermore, if any questions persisted as to the real intention of the parties to permit an evolutionary interpretation of the Treaty – at least as regards Article IV(1) – which would cover economic sanctions, the issue can be seen from a different angle. The issue is not about economic sanctions per se, but about the architecture of the treaty itself and its aim to foster the development of harmonious economic relations. It is hardly conceivable that the parties, if they had been asked in 1955 whether they would accept the US-Iran Treaty of Amity to be interpreted in an evolutionary manner so as to cover future measures which would otherwise render the operation of that treaty ineffective, would have replied with a negative answer. Such answer might raise questions of whether a real intention existed to comply with the tenets of the treaty. And whether such a state of affairs is contrary to the pacta sunt servanda principle, because this might seem to suggest that the state which answered in such a manner was cherry-picking its obligations.

In the end, however, a few caveats apply. Firstly, this is a very specific interpretation based on Washington’s unique position in the world. As such, a similar scenario with different parties might not necessarily lead to the same outcome. Secondly, the argument here is that US sanctions can be scrutinized by reference to the obligation to accord the fair and equitable treatment contained in the 1955 Treaty. The argument does not go on, however, to posit that a violation of the fair and equitable treatment took place, something which will need to be assessed by reference to the specific content of FET, as part of Article IV(1) of the US-Iran treaty (or the US might manage to justify its behaviour by reference to the security exception contained in Article XX(1)(d) of the same treaty). And this is not necessarily the same as the content of a Bilatera Investment Treaty-contained FET. The latter has its specific elements which do not necessarily overlap with the elements of the former. And, thirdly, the present conclusions are irrelevant for modern-day investment treaties. This is because, as mentioned earlier, such treaties are premised on a territorial link between the investor and the host state, the former having to be located on the latter’s territory.

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Evans Ogada says

March 27, 2020

Fantastic read