What are the sources of law on the consequences of investment treaty violations?
Investment treaty provisions
Generally, investment treaties do not set out the consequences of a Host State’s breach of the
treaty. Such absence could be explained by practical considerations during the treaties’
negotiation and rectification. Salacuse points out ‘an explicit provision on damages might
complicate and even frustrate entirely treaty negotiations with developing countries, which
would be especially sensitive to this issue […] such a clause in a negotiated treaty might
prevent ratification by the legislatures of both capital-exporting and capital-importing states
when confronted with the task of approving a treaty that would render their state treasuries
potentially liable to pay substantial damages to a foreign government.’ 1 It could also meant
that tribunals’ roles are to simply determine the parties’ legal rights and obligations only.
Thus treaties generally do not include: (1) Scope of Host State’s remedial measures; (2)
Tribunals’ powers to award monetary damages; and (3) Applicable standards in determining
entitled compensation amount.
However, Article IV of the 1959 Abs-Shawcross Draft Convention on
Investments Abroad. It provides ‘Any breach of this Convention shall entail the obligation
to make full reparation. The Parties shall not recognise or enforce within their territories any
measures conflicting with the principles of this Convention and affecting the property of
nationals of any of the Parties until reparation is made or secured.’ In AIG v Kazakhstan2,
tribunal argued that ‘It is settled law that where a Court or a Tribunal has jurisdiction to
determine a dispute, it also has jurisdiction to determine reparation or compensation.’
Treaty provisions dealing with war, armed conflict and insurrections generally
provide for an absolute right to compensation of losses sustained by the Investor. However,
they require that the Investor be treated similarly to Host State nationals. Article 5 of 1992
Greece-China BIT provides ‘Investors of one Contracting Party whose investments in the
territory of the other Contracting Party suffer losses owing to war or other armed conflict,
revolution, a state of national emergency, revolt, insurrection or riot in the territory of the
latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards
restitution, indemnification, compensation or other settlement, if any, no less favourable than
that which the latter Contracting Party accords to investors of any third State. Resulting
payments shall be freely transferable.’ However, it does not mention the consequences of not
granting NT or MFN, as required under Article 4.
Few treaties explicitly recognise the tribunals’ power to award monetary damages.
Article 1135 of NAFTA (‘Final Award’) provides ‘Where a Tribunal makes a final award
against a Party, the Tribunal may award, separately or in combination, only: (a) monetary
damages and any applicable interest; (b) restitution of property, in which case the award shall
provide that the disputing Party may pay monetary damages and any applicable interest in
lieu of restitution. A tribunal may also award costs in accordance with the applicable
arbitration rules […] A Tribunal may not order a Party to pay punitive damages.’ Similar
provisions can be found in Article 34 of US Model BIT, Article 41 of ASEAN
Comprehensive Investment Agreement, and Article XIII(9) of 2009 Latvia-Canada BIT.
Other treaties implicitly authorise the tribunal to award monetary damages. Article 26(8) of
ECT provides ‘arbitration awards may include an award of interest’, which would only
operate if the award itself contained monetary damages3. This is also seen in Article 54 of
ICSID Convention, which provides that Contracting Parties shall ‘recognize an award
1
Jeswald Salacuse, The Law of Investment Treaties (OUP 2015) 436-437
2
AIG v Kazakhstan, ICSID Case No ARB/01/6, Award (7 October 2003) para 12.1
3
Jeswald Salacuse, The Law of Investment Treaties (OUP 2015) 440
, rendered pursuant to this Convention as binding and enforce the pecuniary obligations
imposed by that award’.
Customary international law
If the treaty provisions do not state the applicable rules for damages, tribunals turn to the
applicable rules of customary international law. The treaty provisions may require tribunals
to decide disputes not only according to applicable treaty provisions, but also according to
‘relevant principles’, ‘general principles’ or ‘applicable principles’ of international law 4. In
SwemBalt v Latvia5, Court of Arbitration found that ‘the right to compensation for breaches
of international law follows from general principles of international law as supplemented by
general principles of law recognised by civilised nations […]’.
The doctrine of reparation arose out of the Chorzów Factory case6. PCIJ clarified the
following7: (1) Host State’s illegal act in international law requires reparation, which was
followed by other decisions; (2) Reparation must re-establish the situation that would have
existed, in all probability, but for the illegal act (hypothetical), not before the illegal act
(status quo ante)8; (3) Remedies can include: (i) Restitution in kind; or otherwise (ii)
Monetary equivalent; or otherwise (iii) Damages for losses sustained. By declaring restitution
as the main remedy and compensation as a subsidiary remedy, PCIJ seems to have departed
from pre-existing jurisprudence suggesting compensation was the main remedy. Also, the
case distinguishes the consequences between lawful and unlawful expropriation.
Article 31 of ILC Draft Articles provides ‘(1) The responsible State is under an
obligation to make full reparation for the injury caused by the internationally wrongful act.
(2) Injury includes any damage, whether material or moral, caused by the internationally
wrongful act of a State.’ Article 34 of ILC Draft Articles enumerates the different forms of
reparation including restitution, compensation and satisfaction (Articles 35-37 provide rules)
which can be applied separately or in combination. Articles 38 and 39 deal with interest and
the injured party’s contribution.
Describe the forms of reparation.
Restitution
Article 35 of ILC Draft Articles provide ‘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.’ Thus these
articles aim to restore the ‘status quo ante’ (before wrongful act), unlike Chorzów Factory
case which imposes a hypothetical scenario (but for wrongful act). The articles’ commentary 9
argues that Article 35’s ‘status quo ante’ approach is the ‘narrower one; it does not extend to
4
Jeswald Salacuse, The Law of Investment Treaties (OUP 2015) 440
5
SwemBalt v Latvia, UNCITRAL, Decision by the Court of Arbitration (23 October 2000) para 38
6
Case Concerning the Factory at Chorzów (Claim for Indemnity) (Germany v Poland) (1928) PCIJ Ser. A., No.
17 pp 46-47
7
Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice (OUP 2011)
50
8
Robert Kalb, The International Law of State Responsibility: An Introduction (Edward Elgar Publishing
Limited, 2017) 184
9
International Law Commission (2001), ‘Draft articles on Responsibility of States for Internationally Wrongful
Acts, with commentaries’ (A/56/10) 96 at para 2
Investment treaty provisions
Generally, investment treaties do not set out the consequences of a Host State’s breach of the
treaty. Such absence could be explained by practical considerations during the treaties’
negotiation and rectification. Salacuse points out ‘an explicit provision on damages might
complicate and even frustrate entirely treaty negotiations with developing countries, which
would be especially sensitive to this issue […] such a clause in a negotiated treaty might
prevent ratification by the legislatures of both capital-exporting and capital-importing states
when confronted with the task of approving a treaty that would render their state treasuries
potentially liable to pay substantial damages to a foreign government.’ 1 It could also meant
that tribunals’ roles are to simply determine the parties’ legal rights and obligations only.
Thus treaties generally do not include: (1) Scope of Host State’s remedial measures; (2)
Tribunals’ powers to award monetary damages; and (3) Applicable standards in determining
entitled compensation amount.
However, Article IV of the 1959 Abs-Shawcross Draft Convention on
Investments Abroad. It provides ‘Any breach of this Convention shall entail the obligation
to make full reparation. The Parties shall not recognise or enforce within their territories any
measures conflicting with the principles of this Convention and affecting the property of
nationals of any of the Parties until reparation is made or secured.’ In AIG v Kazakhstan2,
tribunal argued that ‘It is settled law that where a Court or a Tribunal has jurisdiction to
determine a dispute, it also has jurisdiction to determine reparation or compensation.’
Treaty provisions dealing with war, armed conflict and insurrections generally
provide for an absolute right to compensation of losses sustained by the Investor. However,
they require that the Investor be treated similarly to Host State nationals. Article 5 of 1992
Greece-China BIT provides ‘Investors of one Contracting Party whose investments in the
territory of the other Contracting Party suffer losses owing to war or other armed conflict,
revolution, a state of national emergency, revolt, insurrection or riot in the territory of the
latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards
restitution, indemnification, compensation or other settlement, if any, no less favourable than
that which the latter Contracting Party accords to investors of any third State. Resulting
payments shall be freely transferable.’ However, it does not mention the consequences of not
granting NT or MFN, as required under Article 4.
Few treaties explicitly recognise the tribunals’ power to award monetary damages.
Article 1135 of NAFTA (‘Final Award’) provides ‘Where a Tribunal makes a final award
against a Party, the Tribunal may award, separately or in combination, only: (a) monetary
damages and any applicable interest; (b) restitution of property, in which case the award shall
provide that the disputing Party may pay monetary damages and any applicable interest in
lieu of restitution. A tribunal may also award costs in accordance with the applicable
arbitration rules […] A Tribunal may not order a Party to pay punitive damages.’ Similar
provisions can be found in Article 34 of US Model BIT, Article 41 of ASEAN
Comprehensive Investment Agreement, and Article XIII(9) of 2009 Latvia-Canada BIT.
Other treaties implicitly authorise the tribunal to award monetary damages. Article 26(8) of
ECT provides ‘arbitration awards may include an award of interest’, which would only
operate if the award itself contained monetary damages3. This is also seen in Article 54 of
ICSID Convention, which provides that Contracting Parties shall ‘recognize an award
1
Jeswald Salacuse, The Law of Investment Treaties (OUP 2015) 436-437
2
AIG v Kazakhstan, ICSID Case No ARB/01/6, Award (7 October 2003) para 12.1
3
Jeswald Salacuse, The Law of Investment Treaties (OUP 2015) 440
, rendered pursuant to this Convention as binding and enforce the pecuniary obligations
imposed by that award’.
Customary international law
If the treaty provisions do not state the applicable rules for damages, tribunals turn to the
applicable rules of customary international law. The treaty provisions may require tribunals
to decide disputes not only according to applicable treaty provisions, but also according to
‘relevant principles’, ‘general principles’ or ‘applicable principles’ of international law 4. In
SwemBalt v Latvia5, Court of Arbitration found that ‘the right to compensation for breaches
of international law follows from general principles of international law as supplemented by
general principles of law recognised by civilised nations […]’.
The doctrine of reparation arose out of the Chorzów Factory case6. PCIJ clarified the
following7: (1) Host State’s illegal act in international law requires reparation, which was
followed by other decisions; (2) Reparation must re-establish the situation that would have
existed, in all probability, but for the illegal act (hypothetical), not before the illegal act
(status quo ante)8; (3) Remedies can include: (i) Restitution in kind; or otherwise (ii)
Monetary equivalent; or otherwise (iii) Damages for losses sustained. By declaring restitution
as the main remedy and compensation as a subsidiary remedy, PCIJ seems to have departed
from pre-existing jurisprudence suggesting compensation was the main remedy. Also, the
case distinguishes the consequences between lawful and unlawful expropriation.
Article 31 of ILC Draft Articles provides ‘(1) The responsible State is under an
obligation to make full reparation for the injury caused by the internationally wrongful act.
(2) Injury includes any damage, whether material or moral, caused by the internationally
wrongful act of a State.’ Article 34 of ILC Draft Articles enumerates the different forms of
reparation including restitution, compensation and satisfaction (Articles 35-37 provide rules)
which can be applied separately or in combination. Articles 38 and 39 deal with interest and
the injured party’s contribution.
Describe the forms of reparation.
Restitution
Article 35 of ILC Draft Articles provide ‘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.’ Thus these
articles aim to restore the ‘status quo ante’ (before wrongful act), unlike Chorzów Factory
case which imposes a hypothetical scenario (but for wrongful act). The articles’ commentary 9
argues that Article 35’s ‘status quo ante’ approach is the ‘narrower one; it does not extend to
4
Jeswald Salacuse, The Law of Investment Treaties (OUP 2015) 440
5
SwemBalt v Latvia, UNCITRAL, Decision by the Court of Arbitration (23 October 2000) para 38
6
Case Concerning the Factory at Chorzów (Claim for Indemnity) (Germany v Poland) (1928) PCIJ Ser. A., No.
17 pp 46-47
7
Borzu Sabahi, Compensation and Restitution in Investor-State Arbitration: Principles and Practice (OUP 2011)
50
8
Robert Kalb, The International Law of State Responsibility: An Introduction (Edward Elgar Publishing
Limited, 2017) 184
9
International Law Commission (2001), ‘Draft articles on Responsibility of States for Internationally Wrongful
Acts, with commentaries’ (A/56/10) 96 at para 2
