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Expropriation in Investment Treaty Arbitration by Cox, Johanne M (9th May 2019)

Part III Remedies, 11 Remedies in Customary International Law

From: Expropriation in Investment Treaty Arbitration

Johanne M. Cox

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 16 September 2019

Expropriation — Investor — Standards of treatment — Customary international law — Compensation — Reparations — Restitution

(p. 279) 11  Remedies in Customary International Law

A.  Overview

11.01  The remedies for international wrongful acts under customary international law may apply to cases of expropriation in investment treaty arbitrations in two instances. Firstly, if general international law (which includes customary international law) applies as the governing law;1 and secondly, in cases of unlawful expropriation where the tribunal determines that customary international law applies rather than the treaty standard of compensation. The two principal sources of customary international law for remedies in investment treaty arbitration are the Chorzów Factory case and the International Law Commission’s Articles on State Responsibility (the ILC Articles).

11.02  The importance of applying customary international law only if it is consistent with the parties’ choice of applicable law is highlighted by the annulment award in Venezuela Holdings BV and ors v. Venezuela.2 In this case, an ICSID Annulment Committee held that the tribunal had exceeded its powers to the extent that it had decided that general international law, and specifically customary international law, regulated the determination and assessment of the compensation due to the claimants for the expropriation of their investment in place of the application of the governing law provision in the Netherlands–Venezuela BIT signed on 22 October 1991.3

11.03  The Annulment Committee found that the portions of the award dealing with the compensation due in the sum of USD 1,411.7 million for the admitted (and lawful) (p. 280) expropriation of the claimants’ investment in the Cerro Negro Project—a joint venture to exploit extra-heavy crude in the Orinoco Oil Belt—were so seriously deficient both in their reasoning and in the choice and application of the appropriate sources of law under the governing treaty so as to give rise to grounds for annulment under Article 52(1) of the ICSID Convention.4 Article 9(5) of the BIT provided for the application of the following sources of law:5

  1. i.  the law of the Contracting Party concerned;

  2. ii.  the provisions of this Agreement and other relevant Agreements between the Contracting Parties;

  3. iii.  the provisions of special agreements relating to the investments;

  4. iv.  the general principles of international law; and

  5. v.  such rules of law as may be agreed by the parties to the dispute.

11.04  The Annulment Committee considered that these were the exclusive sources of law for the determination of the dispute under the BIT. The list contained two references to international law: one implicit and one explicit. The explicit reference, in sub-paragraph iv, was to ‘general principles of international law’6—which is different to customary international law—and, in the Annulments Committee’s view, presumably was to be understood as pointing in turn to one of the sources of law enumerated in Article 38(1) of the Statute of the International Court of Justice (ICJ). The implicit reference to international law was in sub-paragraph ii, ‘the provisions of this Agreement’ i.e. to the BIT itself, which, as an inter-State treaty, must necessarily be taken to constitute international law.7 The Committee observed that the BIT gave no indication as to a hierarchy or order of priority between the various sources of law, except the extent that the conjunctive ‘and’ implies that several, or indeed all, of these sources of law may come into play it the circumstances of a particular dispute.8

11.05  Despite this, the Annulment Committee found that the tribunal had made its own addition to the governing law in the BIT by adding in a mention of customary international law and reserving to itself the decision from case to case to ‘determine whether the applicable international law should be limited to general principles of international law under Article 9(5) of the BIT or whether it includes customary international law’.9

11.06  The Annulment Committee further opined that the tribunal had failed to consider the effect of the price cap on compensation found in the special agreements establishing the terms and conditions of the Cerro Negro Project. The Annulment Committee considered that, in an appropriate case, the resolution of a disputed issue under international law can itself entail the application of national law simply because that is what the international rule requires but that this is radically different from an attempt by the State to use its internal law to evade its obligations under the BIT.10 In this respect, Article 9(5) of (p. 281) the BIT allowed for this possibility with its inclusion of ‘the law of the Contracting Party concerned’ and ‘the provisions of this Agreement’ in the governing law. The Annulment Committee found that, despite this, in determining the compensation due, the tribunal had failed to give any consideration to what relevance the limitations on the investors’ rights the price cap might actually have had to the application of the mandatory criteria laid down the BIT’s provision for compensation for expropriation at Article 6(c). The tribunal had instead devoted attention to destroying two straw men—that the price cap was contractually binding in itself in the BIT arbitration, or that the price cap could have the effect of displacing or overriding Venezuela’s international obligations towards the investors.11

11.07  Another failing, in the Annulment Committee’s view, was the failure of the tribunal to properly consider the standard of compensation. This topic is addressed in Chapter 12 (The Standard of Compensation). The tribunal had found that the compensation must be calculated in conformity with the requirements of Article 6(c) of the BIT which provided for ‘just compensation’ calculated in accordance with the market value of the expropriated asset. In its view, this corresponded to the amount that a willing buyer would have been ready to pay to a willing seller at the time in order to acquire the expropriated interests. The Annulment Committee noted that the focus in the award then shifted immediately to the detail of a discounted cash flow analysis and that there was no discussion at all of what should be understood, in the circumstances of the case, by the principal criterion of ‘just compensation’ or of what, in the particular circumstances, should be understood by the market value of the investments affected. Nor was there any further development to be found of the tribunal’s own determination that the measure of market value is what a willing buyer would have been prepared to pay to a willing seller. Moreover, the only consideration given to the price cap was in connection with the two straw men and there was no discussion of any kind of what effect the price cap (as a limitation on the investor’s rights) might have had on the ‘market value’ of the investment or on the intentions and calculations of the hypothetical willing buyer. This was notwithstanding the facts that, in the Committee’s view, this would seem to be a necessary and inevitable element in any willing buyer/willing seller analysis, and this precise proposition had been put in argument by Venezuela.12

B.  The Chorzów Factory Case and the Principle of Full Reparation

11.08  The Chorzów Factory case is considered the leading authority on the distinction under customary international law between lawful expropriation and expropriation which is unlawful, and the consequences that follow: for lawful expropriation, the remedy is the treaty standard of compensation, whereas for unlawful expropriation the remedy is full reparation. Relying on Chorzów Factory, investors can choose to argue that the tribunal should apply a valuation date as of the date of the award if the investment increased (or would have increased) in value since the date of taking.

(p. 282) 11.09  In Chorzów Factory, the Permanent Court of International Justice (PCIJ) found that, on 3 July 1922, Poland illegally expropriated a nitrate factory at Chorzów in Upper Silesia and other interests from two German companies, Oberschlesische Stickstoffwerke AG and Bayerische Stickstoffwerke AG. The facts of the case are more fully set out in Chapter 4, Section C (The Concept of Expropriation). The PCIJ opined on the consequences for a State of engaging in an internationally wrongful act, holding that reparation was an indispensable complement of a failure to apply the treaty:

It is a principle of international law that the breach of an engagement involves an obligation to make reparation in an adequate form. Reparation therefore is the indispensable complement of a failure to apply a convention itself. Differences relating to reparations, which may be due by reason of failure to apply a convention, are consequently differences relating to its application.13

11.10  In the claim for indemnity,14 the PCIJ considered the principle of reparation in more detail. It drew a distinction between lawful and unlawful expropriation and held that for acts of unlawful expropriation, the compensation due is not necessarily limited to the value of the undertaking at the moment of dispossession, plus interest to the date of the payment:

The action of Poland which the Court has judged to be contrary to the Geneva Convention is not an expropriation—to render which lawful only the payment of fair compensation would have been wanting; it is a seizure of property, rights and interests which could not be expropriated even against compensation, save under the exceptional conditions fixed by Article 7 of the said Convention. As the Court has expressly declared in Judgment no. 8, reparation is in this case the consequence not of the application of Articles 6 to 22 of the Geneva Convention, but of acts contrary to those articles. It follows that the compensation due to the German Government is not necessarily limited to the value of the undertaking at the moment of dispossession, plus interest to the day of payment. This limitation would only be admissible if the Polish Government had had the right to expropriate, and if its wrongful acts consisted merely in not having paid to the two Companies the just price of what was expropriated; in the present case, such a limitation might result in placing Germany and the interests protected by the Geneva Convention, on behalf of which interests the German Government is acting, in a situation more unfavourable than that in which Germany and these interests would have been if Poland had respected the said Convention. Such a consequence would not only be unjust, but also and above all incompatible with the aim of Article 6 and the following articles of the Convention, that is to say, the prohibition, in principle, of the liquidation of the property, rights and interests of German nationals and of companies controlled by German nationals in Upper Silesia—since it would be tantamount to rendering lawful liquidation and unlawful dispossession indistinguishable in so far as their financial results are concerned (emphasis added).15

The PCIJ further stated in a dictum, which is often relied on by claimants in investment treaty arbitrations, that for expropriations that are unlawful per se, the reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed had the act not been committed:

The essential principle contained in the actual notion of an illegal act—a principle which seems to be established by international practice and in particular by the decisions of arbitral (p. 283) tribunals—is that reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if the act had not been committed. Restitution in kind, or, if it is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it—such are the principles which should serve to determine the amount of compensation due for an act contrary to international law …

The dispossession of an industrial undertaking—the expropriation of which is prohibited by the Geneva Convention—then involves the obligation to restore the undertaking and, if this be not possible, to pay its value at the time of the indemnification, which value is designed to take the place of restitution which has become impossible. To this obligation, in virtue of the general principles of international law, must be added that of compensating loss sustained as the result of the seizure (emphasis added).16

11.11  The PCIJ arranged for the holding of an expert enquiry to assist in the determination of the sum to be awarded to Germany in order to enable it to place the dispossessed companies so far as possible in the economic situation which they would probably have been in if the seizure had not taken place.17 It put two questions to the enquiry—both premised on the principle of reparation but the second one taking into consideration information post expropriation. Firstly, what was the value of the undertaking (including the lands, buildings, equipment, stocks, and processes at its disposal, supply and delivery contracts, goodwill and future prospects) at the time of the taking, and what would have been the financial results (profits or losses) which would probably have been given by the undertaking to the date of the judgment, if it had still been in the hands of Bayerische and Oberschlesische Stickstoffwerke? Secondly, what would be the value of the undertaking at the date of the judgment if the undertaking (including lands, buildings, equipment, stocks, available processes, supply and delivery contracts, goodwill, and future prospects) had remained in the hands of the Bayerische and Oberschlesische Stickstoffwerke, and had either remained substantially as it was in 1922 or had been developed proportionately similar to those applied in the case of other undertakings of the same kind controlled by the Bayerische, for instance, the undertaking of which the factory is situated at Piesteritz?

11.12  The PCIJ explained that the purpose of the first question was to determine the monetary value, both of the object which should have been restored in kind and of the additional damage, on the basis of the estimated value of the undertaking at the moment of taking possession by the Polish government, together with any probable profit that would have accrued to the undertaking between the date of taking possession and that of the expert opinion. The purpose of the second question was to ascertain the present value on the basis of the situation at the moment of the expert enquiry and leaving aside the situation presumed to exist in 1922. The PCIJ noted that the hypothetical nature of this question was considerably diminished by the possibility of comparison with other undertakings of the same nature directed by the Bayerische, and, in particular, with the Piesteritz factory.18

(p. 284) 11.13  The ICJ has since reaffirmed the principles in Chorzów Factory. In its Advisory Opinion on the Legal Consequences of a Wall in the Occupied Palestinian Territory—an opinion requested by the United Nations’ General Assembly—the ICJ opined that the construction of a wall by Israel in the Occupied Palestinian Territory, including in and around East Jerusalem, and the resulting destruction and requisitions of properties, was illegal. The ICJ reaffirmed the remedy laid down in Chorzów Factory for wrongful seizure of property and held that Israel had an obligation to make reparation for the damage caused and to return the land and other immovable property seized for purposes of construction of the wall. In the event that restitution should prove to be materially impossible, Israel was under an obligation to compensate in accordance with principles of international law.19

11.14  Chorzów Factory may be almost 100 years old but its enduring legacy in investment treaty arbitration is clear. It is routinely relied on by foreign investors as authority to support the proposition that customary international law, as opposed to the treaty standard of compensation, should apply in cases of unlawful expropriation and that they are therefore entitled to full reparation. Sometimes investors have sought restitution, but more often compensation. Tribunals frequently apply the principles of full reparation in Chorzów Factory when awarding compensation for unlawful expropriation. However, some tribunals have held that the treaty standard of compensation, not customary international law, applies in cases of both lawful and unlawful expropriation. This is explored further in Chapter 12 (The Standard of Compensation).

C.  The International Law Commission Articles on State Responsibility

11.15  The ILC Articles are generally understood as a codification of the customary international law principles of State responsibility for internationally wrongful acts including a State’s breach of its treaty obligations. The accompanying Commentary to the ILC Articles refers to the full reparation principle in Chorzów Factory.

11.16  No attempt was made to limit the scope of the ILC Articles to obligations of States owed exclusively to other States20 and the ILC Articles are routinely referred to by parties and tribunals in investment treaty arbitrations. Articles 1, 31, and 34–9 are the most commonly referred to in this context.

Article 1 is a general principle and provides that every internationally wrongful act of a State entails the international responsibility of that State:

Article 1.  Responsibility of a State for its internationally wrongful acts

  • Every internationally wrongful act of a State entails the international responsibility of that State.

(p. 285) Article 31(1) provides that a State is under an obligation to make full reparation for an internationally wrongful act:

Article 31.  Reparation

  1. 1.  The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act.

  2. 2.  Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.

11.17  The Commentary to the ILC Articles explains that the obligation placed on the responsible State by Article 31 is to make ‘full reparation’ in the sense conveyed by the Chorzów Factory case.21 The general principle that reparation is an indispensable complement of breach of an international obligation was stated by the PCIJ in that case.22 The Commentary further explains that the Court opined that reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.23

11.18  The general obligation of reparation is formulated in Article 31 as the immediate corollary of a State’s responsibility, i.e. as an obligation of the responsible State resulting from the breach, rather than as a right of an injured State or States.24 Article 31(2) addresses a further issue, namely, that there must be a causal link between the internationally wrongful act and the injury.25

11.19  The injured party is also under a duty to mitigate damage. The Commentary explains that failure to do so may preclude recovery to that extent:

Even the wholly innocent victim of wrongful conduct is expected to act reasonably when confronted by the injury. Although often expressed in terms of a ‘duty to mitigate’, this is not a legal obligation which itself gives rise to responsibility. It is rather that a failure to mitigate by the injured party may preclude recovery to that extent. The point was clearly made in this sense by ICJ in the Gabcˇíkovo-Nagymaros Project case:

Slovakia also maintained that it was acting under a duty to mitigate damages when it carried out Variant C. It stated that ‘It is a general principle of international law that a party injured by the non-performance of another contract party must seek to mitigate the damage he has sustained’.26

11.20  In Middle East Cement Shipping and Handling Co. SA v. Egypt,27 the claimant alleged that its investment in a licence to import and export cement as a Free Zone activity had been expropriated by the ‘de facto revocation of the license’ by Ministerial Decree No. 195 of 28 May 28 which prohibited the import of grey portland cement, and Egypt’s conduct thereafter. The claimant also alleged that the auction and seizure of its ship, Poseidon, (p. 286) constituted a measure ‘tantamount to expropriation’. The tribunal found that claimant’s investment had been indirectly expropriated. In considering Egypt’s contention that the claimant had failed in its duty to mitigate damage, the tribunal stated that the duty to mitigate can be considered part of the general principles of international law:

The duty to mitigate damages is not expressly mentioned in the BIT. However, this duty can be considered to be part of the General Principles of Law which, in turn, are part of the rules of international law which are applicable in this dispute according to Art. 42 of the ICSID Convention. The duty to mitigate is also contained in Art. 221 of the Egyptian Civil Code.28

The tribunal rejected Egypt’s arguments. Egypt argued that the claimant could have continued to supply cement insofar as it was not prohibited by Decree No. 195 but the tribunal found that other types of cement were not economically feasible alternatives to the supply of the type of cement barred by the Decree. Egypt also argued that the claimant could have resumed its activities in 1992 after the lifting of the ban. The tribunal rejected this, finding ‘An investor who has been subjected to a revocation of the essential license for its investment activity, three years earlier, has good reason to decide that, after that experience, it shall not continue with the investment activity, after the activity is again permitted’. Lastly, the tribunal rejected Egypt’s argument that the claimant could have obtained permission to take the Poseidon out of the Free Zone by fulfilling the requirements set by the authorities and by paying the alleged debts leading to the attachment and auction of the ship.29

11.21  In EDF International SA, SAUR International SA and León Participaciones Argentinas SA v. Argentina,30 the tribunal held that it would be patently unfair to allow the claimants to recover damages for loss that could have been avoided by taking reasonable steps. In other words, the injured party must be held responsible for its own contribution to the loss.31 The tribunal opined that whether the aggrieved party had taken reasonable steps to reduce the loss is a question of fact, not law, and what is reasonable depends largely upon the facts of the individual case.32 The tribunal further opined that the duty to mitigate is a well-established principle of international law citing the Commentary to ILC Article 31 in support.33 The tribunal considered the extent to which the sales price of the claimant’s shares should be deemed adjusted (and thus damages should be reduced) as a consequence and decided an amount equivalent to the 50 per cent of the value of their participation.34

11.22  Article 34 provides that full reparation can take the form of restitution and/or compensation:

(p. 287)

Article 34. Forms of reparation

Full reparation for the injury caused by the internationally wrongful act shall take the form of restitution, compensation and satisfaction, either singly or in combination, in accordance with the provisions of this chapter.

An example of where restitution and compensation in combination may be an appropriate form of reparation is when the wrongful act has caused additional material damage:

For example, re-establishment of the situation which existed before the breach may not be sufficient for full reparation because the wrongful act has caused additional material damage (e.g. injury flowing from the loss of the use of property wrongfully seized). Wiping out all the consequences of the wrongful act may thus require some or all forms of reparation to be provided, depending on the type and extent of the injury that has been caused.35

There are three forms of reparation: restitution, compensation, and satisfaction.

11.23  The first, and primary form of reparation is restitution. ILC Article 34 contemplates that full reparation can take the form of restitution and, more specifically, ILC Article 35 provides that a State responsible for an internationally wrongful act is under an obligation to provide restitution provided, and to the extent that, it is materially possible and proportionate:

Article 35. Restitution

A State responsible for an internationally wrongful act is under an obligation to make restitution, that is, to re-establish the situation which existed before the wrongful act was committed, provided and to the extent that restitution: (a) is not materially impossible; (b) does not involve a burden out of all proportion to the benefit deriving from restitution instead of compensation.

11.24  The Commentary notes that restitution comes first amongst the forms of reparation because it most closely conforms to the general principle that the responsible State is bound to wipe out the legal and material consequences of its wrongful act by re-establishing the situation that would exist if that act had not been committed. This was confirmed by PCIJ in Chorzów factory.36 On the other hand, there are often situations where restitution is not available or where its value to the injured State—or, in the case of investment treaty disputes, the foreign investor—is so reduced that other forms of reparation take priority.37

11.25  It is unusual for investment treaty tribunals to award restitution and, more often than not, foreign investors seek compensation for their losses. However, restitution has been awarded. In Bernhard von Pezold and ors v. Zimbabwe,38 ten years after the claimants’ properties in Zimbabwe had been expropriated, the tribunal found that the properties had been unlawfully expropriated in violation of the German–Zimbabwe BIT signed on 29 September 1995 and the Swiss–Zimbabwe BIT signed on 15 August 1996. The tribunal awarded restitution of the properties, as well as compensation for the losses incurred by the claimants due to, inter alia, land damage and losses to productivity.39 The properties had (p. 288) been expropriated following Zimbabwe’s independence and the election of Robert Mugabe as President in 1980 and the subsequent land policies which reversed the land policies favouring the white minority population, replacing them with policies favouring the black indigenous population. These policies were accompanied by the invasions of private land by settlers.40 All three of the claimants’ estates had been invaded and the settlers who invaded the properties remained in occupation of certain portions of the estates.41

11.26  In reaching its decision, the tribunal considered, firstly, the principle attributed to the Chorzów Factory case that restitution is the primary legal remedy for international wrongs.42 Secondly, that the ILC Articles confirm restitution as the principal form of reparation in international law. Although the dispute at hand was between and investor and State, the tribunal considered that the ILC Articles would be of considerable guidance to it.43 The tribunal observed that restitution is demarcated between material restitution and juridical restitution—the former usually involving the return of property, whereas the latter involves modifying the legal situation, although they are not exclusive, and both may be awarded if the situation requires it.44 Thirdly, nothing in the BITs prevented an award of restitution and the language of the BITs supported the tribunal’s finding of jurisdiction to award restitution45—the BITs both recognized compensation for expropriation and contained other provisions relating to losses which expressly referred to restitution, indicating that they anticipated restitution as a ground for relief. Fourthly, the claimants had pleaded a basis for awarding restitution in arguing that the expropriation of the properties was unlawful and in breach of a peremptory norm. The tribunal accepted that either breach could be a ground for restitution.46

11.27  The tribunal also considered the State defences to restitution in ILC Article 35, namely, material impossibility and disproportionality. It concluded that there was no material impossibility in returning the land—the legal title simply needed to be issued. The tribunal noted that Zimbabwe had admitted to four occasions in the past where it had provided restitution to foreign investors.47 The tribunal found that it was not disproportionate to award title to lands unlawfully expropriated as the decision was limited to the claimants and would not have systemic influence across Zimbabwe and did not involve any widescale juridical restitution or attack on Zimbabwe’s sovereignty.48

11.28  In Crystallex International Corp. v. Venezuela,49 the primary remedy sought by the claimant was restitution of its investment in gold mining in Venezuela through the re-establishment of a Mine Operation Contract according to its terms and through the grant of the permit, together with any consequent damages as a consequence of not granting the permit earlier.50 The claimant relied on the principle of full reparation in the Chorzów Factory (p. 289) case.51 However, the claim for relief was later revised for reason that restitution had become impossible after the Venezuelan government entered into agreements with a third party granting it rights to the gold mine, Las Cristinas.52 Instead, after finding that Venezuela had violated the expropriation and FET protections of the BIT, the tribunal awarded compensation applying the ‘full reparation’ principle under customary international law.

11.29  In ATA Construction, Industrial and Trading Company v. Jordan,53 the tribunal held that the claimant’s investment, its right to arbitrate under a contract to construct a dike at a site on the Dead Sea entered into on 2 May 1998, had been unlawfully expropriated by the Jordanian courts. In the tribunal’s view, the single remedy which could implement the Chorzów standard of repairing all the consequences of the unlawful act was the restoration of the claimant’s right to arbitration. The tribunal noted that the respondent had already indicated its willingness to accept such an offer by offering to submit the ongoing dispute in relation to Dike no. 19 to a new commercial arbitration in lieu of proceeding in the Jordanian courts. The tribunal considered that this offer was ‘tantamount to offering the restoration of the Claimant’s right to arbitration’ and ordered: (i) that the ongoing Jordanian court proceedings in relation to the to the Dike no. 19 dispute be immediately and unconditionally terminated, with no possibility to conduct further judicial proceedings in Jordan or elsewhere on the substance of the dispute, and (ii) that the claimant was entitled to proceed to arbitration in relation to the Dike no. 19 dispute in accordance with the terms of the arbitration agreement in the contract.54

11.30  The second form of reparation is compensation. This is the most common form of reparation awarded in investment treaty arbitration and is more fully addressed in Chapter 12 (The Standard of Compensation). ILC Article 36 provides that a State must compensate for the damage caused insofar as it is not made good by restitution. Compensation shall include loss of profits insofar as established:

Article 36. Compensation

  1. 1.  The State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution.

  2. 2.  The compensation shall cover any financially assessable damage including loss of profits insofar as it is established.

11.31  The Commentary adds that the function of compensation is to address the actual losses incurred. Compensation is purely compensatory and is not concerned to punish the responsible State, nor does compensation have an expressive or exemplary character.55 The Commentary notes that loss of profits played a role in the Chorzów factory case itself with the Court deciding that the injured party should receive the value of property by way of damages not as it stood at the time of expropriation but at the time of indemnification.56 The Commentary also notes that ‘awards for loss of profits have been made in respect (p. 290) of contract based lost profits in Libyan American Oil Company (LIAMCO) and in some ICSID arbitrations. Nevertheless, lost profits have not been as commonly awarded in practice as compensation for accrued losses. Tribunals have been reluctant to provide compensation for claims with inherently speculative elements’.57

11.32  If loss of profits is awarded, the Commentary states that it is inappropriate to award interest under Article 38 on the profit-earning capital over the same period of time, simply because the capital sum cannot be simultaneously earning interest and generating profits. The essential aim is to avoid double recovery while ensuring full reparation.58

11.33  The third form of reparation is satisfaction. Article 37 provides that satisfaction may consist of other relief including declaratory relief, but it must also be proportionate:

Article 37. Satisfaction

  1. 1.  The State responsible for an internationally wrongful act is under an obligation to give satisfaction for the injury caused by that act insofar as it cannot be made good by restitution or compensation.

  2. 2.  Satisfaction may consist in an acknowledgement of the breach, an expression of regret, a formal apology or another appropriate modality.

  3. 3.  Satisfaction shall not be out of proportion to the injury and may not take a form humiliating to the responsible State.

11.34  The award of interest in investment treaty arbitrations is addressed in Chapter 14 (Interest). ILC Article 38 provides that interest shall be payable when necessary to ensure full reparation and the interest rate and mode of calculation shall be set so as to achieve that result. Interest runs from the date when the principal sum should have been paid until the date the obligation to pay is fulfilled. The award of interest depends on the circumstances of each case, in particular, whether interest is necessary in order to ensure full reparation.

11.35  Finally, Article 39 provides that account shall be taken of any contribution to the injury:

Article 39. Contribution to the injury

In the determination of reparation, account shall be taken of the contribution to the injury by wilful or negligent action or omission of the injured State or any person or entity in relation to whom reparation is sought.

11.36  In Yukos Universal Ltd v. Russia,59 the tribunal considered the theory of contributory fault. It made three general observations. Firstly, the legal concept of contributory fault must not be confused with the investor’s duty to mitigate its losses.60 Secondly, there are cases where the contributory fault of the investor, while it may have increased the loss which it sustained, was unrelated to the wrongdoing of the State61 but the fault of the investor in those (p. 291) cases contributed to the losses which flowed from the wrongful act of the State. Lastly, there are instances where tribunals have found that the victim contributed to the State’s wrongful conduct62 and the contributory fault of the investor in those cases provoked the wrongful conduct of the State.

11.37  Applying ILC Article 39 and its Commentary, the tribunal considered whether the claimants’ and Yukos’ tax avoidance arrangements in some of the low-tax regions contributed to their injury in a material and significant way, or whether they were minor contributory factors which, based on subsequent events such as the decision of the Russian authorities to destroy Yukos, could not be considered, legally, as a link in the causative chain.63

11.38  The tribunal concluded, in the exercise of its wide discretion, that as a result of the material and significant misconduct by the claimants and by Yukos (which they controlled), the claimants had contributed to the extent of 25 per cent to the prejudice which they suffered as a result of the Russian Federation’s destruction of Yukos.64 The tribunal therefore reduced the amount of damages by 25 per cent to USD 50,020,867,798.65

D.  Moral Damages

11.39  Foreign investors can also claim moral damages for acts of expropriation, although the threshold for making out a claim is a high one. The Commentary to ILC Article 31 explains that, in particular, in accordance with paragraph 2, ‘injury’ includes any material or moral damages caused thereby.66

11.40  In SARL Benvenuti & Bonfant v. Congo,67 the tribunal held that Congo had unlawfully expropriated B&B’s shares in PLASCO, a joint venture company owned 60 per cent by Congo and 40 per cent by B&B to manufacture plastic bottles, and was obliged to provide compensation under Congolese law, principles of international law, and equity.68 In addition to compensation, B&B also claimed moral damages on the basis that it had lost work and investment opportunities in Italy and because resumption of activity in Italy was hampered by the commitment of its capital in Congo. It further asserted that it had lost credit with supplies and banks following events in Congo and that it had suffered from the loss of staff.

11.41  The tribunal noted a lack of evidence to support these allegations but concluded that the measures complained of, and the subsequent proceedings, had certainly disturbed B&B’s activities. It awarded damages for intangible loss totalling CFA5 million and interest at 10 (p. 292) per cent on this amount. The tribunal awarded this based on its authority to decide the dispute on an equitable basis.69

11.42  In Desert Line v. Yemen,70 the claimant brought an ICSID claim alleging that its investment in a project to construct asphalt roads had been unlawfully expropriated by Yemen in violation of protections in the Yemen–Oman BIT signed on 20 September 1998, including expropriation. The claimant, represented by its chairman, and the Minister of Public Works and Highways in Yemen, had concluded an arbitration agreement, pursuant to which, the claimant submitted its dispute for moneys owned in relation to the project to arbitration before a Yemeni Arbitral Tribunal. After a six-week arbitration, on 9 August 2004, the tribunal awarded, inter alia, the claimant YR 18,447,857,500 in damages, plus additional costs.71 The acts complained of in the ICSID arbitration happened thereafter, and included: the respondent’s failure to provide accurate data to the Yemeni Arbitral Tribunal to remedy calculation errors adverse to the claimant in an award or to give its consent for such corrections; the respondent’s failure to make payment of the amount awarded to the claimant under the award; the respondent’s failure to immediately release, as ordered by the arbitral tribunal’s award, the claimant’s guarantees; the respondent’s failure to authorize the claimant to have free disposition of its equipment; the respondent’s arrest and detention of the claimant’s personnel for three days; the respondent’s failure to protect the claimant from third-party harassment, intimidation, and theft; and the respondent’s failure to pre-qualify the claimant in a tender for other road construction projects in Yemen.72

11.43  The tribunal considered that there was a substantial overlap between the facts regarding the breach of the FET standard and the other treaty protections, and moreover, that the claimant’s alleged financial damages for the violations of the BIT were not related to a specific breach of the BIT and may all be derived from the violation of the FET standard. For this reason, the tribunal considered it unnecessary to determine whether there was liability for other provisions of the BIT, including expropriation.73

11.44  The tribunal awarded amounts due under the contracts and/or the Yemeni Arbitration Award74 whilst dismissing other of the claims. In addition, the claimant sought moral damages based on international law in the sum of OR 40 million. The claimant alleged that it had suffered moral damage as a result of the respondent’s breaches under the BIT: the claimant’s executives suffered the stress and anxiety of being harassed, threatened, and detained by the respondent as well as armed tribes; the claimant had suffered significant injury to its credit and reputation and lost its prestige, and the claimant’s executives had been intimidated by the respondent in relation to the contracts.75

11.45  The tribunal considered that, even if investment treaties primarily aim at protecting property and economic values they do not exclude, as such, that a party may, in exceptional circumstances, ask for compensation for moral damages. The tribunal also noted that it is (p. 293) accepted in most legal systems that moral damages may also be recovered besides pure economic loss. For those reasons, the tribunal saw no reason to exclude them.76

11.46  The tribunal referred to the Lusitania Case, whereby it was held that non-material damages may be ‘very real, and the mere fact that they are difficult to measure or estimate by monetary standards makes them none the less real and affords no reason why the injured person should not be compensated’.77

11.47  The tribunal found that the violation of the BIT, in particular the physical duress exerted on the executives of the claimant, was malicious and therefore constituted a fault-based liability; therefore, the respondent was liable to reparation for the injury suffered by the claimant, whether it be bodily, moral, or material in nature. The tribunal agreed with the claimant that its prejudice was substantial since it affected the physical health of the claimant’s executives and the claimant’s credit and reputation.78 The tribunal considered that the amount sought by the claimant in moral damages was exaggerated but awarded the sum of USD 1 million for moral damages, including loss of reputation, without interest.79

11.48  In Joseph Charles Lemire v. Ukraine,80 the tribunal, after summarizing the case law on moral damages including the Lusitania case and Desert Line v. Yemen, concluded that, as a general rule, moral damages are not available to a party injured by the wrongful acts of a State, but that moral damages can be awarded in exceptional cases, provided that:

  • –  the State’s actions imply physical threat, illegal detention, or other analogous situations in which the ill-treatment contravenes the norms according to which civilized nations are expected to act; and

  • –  the State’s actions cause a deterioration of health, stress, anxiety, other mental suffering such as humiliation, shame and degradation, or loss of reputation, credit and social position; and—both cause and effect are grave or substantial.


1  On the applicable law, the ICSID tribunal in LG&E v. Argentina held that applying international law is to be understood as encompassing customary international law: ‘Likewise, applying the rules of international law is to be understood as comprising the general international law, including customary international law, to be used as an instrument for the interpretation of the Treaty.’. LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability of 3 October 2006, para. 89.

2  Venezuela Holdings BV and ors v. Venezuela, Award, ICSID Case No. ARB/07/27, Decision for Annulment of 9 March 2017.

3  Ibid, para. 188(a).

4  Ibid, para. 189.

5  Netherlands–Venezuela BIT signed on 22 October 1991, Article 9(5).

6  The ICJ Statute separately lists and distinguishes between ‘international custom’ (Article 38(1(b)) and ‘general principles of international law’ (Article 38(1)(d)).

7  Venezuela Holdings BV and ors v. Venezuela, Award, Decision for Annulment of 9 March 2017 para. 159 at n. 2.

8  Ibid, para. 154.

9  Ibid, para. 159.

10  Ibid, para. 181.

11  Ibid, para. 184.

12  Ibid, para. 184.

13  Factory at Chorzów (Jurisdiction) Judgement No. 8, 1927, PCIJ, Series A, No. 9, p. 21 (PCIJ, 26 July 1927).

14  Factory at Chorzów (Claim for Indemnities—Merits), Judgment No. 13, Series A, No. 17 (PCIJ, 13 September 1928).

15  Ibid, pp. 46 and 47.

16  Ibid, pp. 46–9; see also UNCTAD Report, Taking of Property, 2000, footnote 4, p. 16 (‘The consequence of an illegal taking is that reparation will not be confined to the making good of the loss alone, but additional factors will be taken into account such as loss of future earnings’).

17  Ibid, p. 49.

18  Ibid, pp. 51–2.

19  Legal Consequences of the Construction of a Wall in the Occupied Palestinian Territory, ICJ Advisory Opinion, 2 July 2004 ICJ 136, paras 152 and 153.

20  Crawford, The International Law Commission’s Articles on State Responsibility, Introduction, Text and Commentaries, Cambridge University Press, p. 11. Crawford further explains that Article 1 specified that a breach of any international obligation gave rise to the responsibility of the State concerned, without specifying to who that responsibility arose and that at various stages in the draft negotiations it was proposed that Article 1 be amended to insert the phrase ‘towards another State’ or ‘to an injured State.’ Commentary to Article 31 at para. 3.

21  Ibid, p. 91, Commentary to Article 31 at para. 3.

22  Ibid, p. 91, Commentary to Article 31 at para. 1 citing Factory at Chorzów, Jurisdiction, Judgment No. 8, 1927, PCIJ, Series A, No. 9, p. 21.

23  Ibid, p. 91, Commentary to Article 31 at para. 1 citing Factory at Chorzów, Jurisdiction, Judgment No. 8, 1927, PCIJ, Series A, No. 9, p. 47.

24  Ibid, p. 91, Commentary to Article 31 at para. 4.

25  Ibid, p. 92, Commentary to Article 31 at para. 9.

26  Ibid, p. 93, Commentary to Article 31 at para. 11.

27  Middle East Cement Shipping and Handling Co. SA v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award of 12 April 2002.

28  Ibid, para. 167.

29  Ibid, paras 168–71.

30  EDF International SA, SAUR International SA and León Participaciones Argentinas SA v. Argentine Republic, ICSID Case No. ARB/03/23, Award of 11 June 2012.

31  Ibid, para. 1301.

32  Ibid, para. 1306.

33  Ibid, para. 1302 and footnote 91. The tribunal also cited at paras 1302–5 Middle East Cement Shipping and Handling Co. S.A. v. Egypt Award of 12 April 2002, para. 167 at n. 27 and the ICJ Case Concerning the Gabčíkovo-Nagymaros Project (Hungary/Slovakia), Judgment of 25 September 1997, at para. 80.

34  Ibid, paras 1311 and 1312.

35  ILC Articles, p. 95, Commentary to Article 34 at para. 2.

36  Ibid, p. 97, Commentary to Article 35 at para. 3.

37  Ibid, Commentary to Article 35 at para. 4 which refers only to the ‘injured State’.

38  Bernhard von Pezold and ors v. Republic of Zimbabwe, ICSID Case No. ARB/10/15, Award of 28 July 2014.

39  Ibid, para. 744.

40  Ibid, para. 3.

41  Ibid, para. 115.

42  Ibid, para. 682.

43  Ibid, para. 691.

44  Ibid, para. 688.

45  Ibid, paras 712 and 717.

46  Ibid, para. 722.

47  Ibid, para. 731.

48  Ibid, para. 735.

49  Crystallex International Corp. v. Venezuela, ICSID Case No. ARB(AF)/11/12, Award, IIC 984 (2016), dispatched 4 April 2016.

50  Ibid, para. 721.

51  Ibid, para. 722.

52  Ibid, para. 724.

53  ATA Construction, Industrial and Trading Company v. The Hashemite Kingdom of Jordan, ICSID Case No. ARB/08/2, Award of 18 May 2010.

54  Ibid, paras 129–32.

55  ILC Articles,, p. 99, Commentary to Article 36 at para. 4.

56  Ibid, p. 104, Commentary to Article 36 at para. 27 citing Factory at Chorzów, Merits, pp. 47–8 and 53.

57  Ibid, p. 104, Commentary to Article 36 at para. 27.

58  Ibid, p. 105, Commentary to Article 36 at para. 33.

59  Yukos Universal Ltd v. Russian Federation, PCA Case No. AA 227, Final Award, IIC 652 (2014), ICGJ 481 (PCA 2014), 18 July 2014, Permanent Court of Arbitration (PCA).

60  Ibid, para. 1603 citing EDF International SA and ors v. Argentine Republic, ICSID Case No. ARB/03/23, Award of 11 June 2012, para. 1301; Middle East Cement Shipping and Handling Co. SA v. Arab Republic of Egypt, Award of 12 April 2002 at n. 27; and AIG Capital Partners, Inc. and anor v. Republic of Kazakhstan, ICSID Case No. ARB/01/6, Award of 7 October 2003.

61  Ibid, para. 1604 citing MTD v. Chile, and Iurii Bogdanov, Agurdino-Invest Ltd and Agurdino-Chimia JSC v. Republic of Moldova, SCC Rules, Award of 22 September 2005.

62  Ibid, para. 1605 citing Antoine Goetz & Consorts et SA Affinage des Metaux v. Republique du Burundi, ICSID Case No. ARB/01/2, Award of 21 June 2012 and Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador, ICSID Case No. ARB/06/111, Award of 5 October 2012.

63  Ibid, para. 1633.

64  Ibid, para. 1637.

65  Ibid, paras 1826–7.

66  ILC Articles, p. 91, Commentary to Article 31 at para. (5)

67  SARL Benvenuti & Bonfant v. People’s Republic of the Congo, ICSID Case No. ARB/77/2, Award of 8 August 1980.

68  Ibid, paras 4.56–4.65.

69  Ibid, para. 289. Summary of award in Happ and Rubins, Digest of ICSID Awards and Decisions 1974–2002, OUP, 2013.

70  Desert Line v. Yemen, ICSID Case No. ARB/05/17, Award of 6 February 2008.

71  Ibid, para. 31.

72  Ibid, para. 211.

73  Ibid, paras 213 and 214.

74  Ibid, para. 253.

75  Ibid, para. 286.

76  Ibid, para. 289.

77  Ibid, para. 289. The Lusitania Case of 1923, VII UNRIAA 32, 40 (1923).

78  Ibid, para. 290.

79  Ibid, paras 290 and 291.

80  Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award of 28 March 2011, para. 333.