1 Introduction

The Articles on State Responsibility for Internationally Wrongful Acts (‘ARSIWA’) constitute an experiment in international law-making. Unlike other successful projects of the International Law Commission (‘ILC’), such as its work on the law of treaties and diplomatic and consular relations, the ARSIWA have not yet led to the adoption of a multilateral treaty.Footnote ¹ Yet, their text is cited commonly as the authoritative statement of the law on State responsibility with investment tribunals being by far their most frequent users. To put this into perspective, in a 2017 report to the UN General Assembly, the UN Secretariat identified 392 publicly available decisions of various bodies which make reference to the ARSIWA including those of the ICJ, the ICC, the WTO, international and hybrid criminal tribunals, and human rights courts and treaty bodies.Footnote ² Although the report does not provide a specific number for investment arbitrations, it records 264 arbitral decisions referencing ARSIWA (72.5%) with investment tribunals accounting for the majority of these references.Footnote ³ At the same time, the interpretation and/or application of ARSIWA is one of the most common issues arising in investment arbitration. In numerical terms, 444 cases have led to a decision since 2000 including cases in which no issues of responsibility arose or in which the reasoning of the decision is not public.Footnote ⁴ The present study has traced at least 200 decisions issued in the same period citing ARSIWA or its previous versions. The extent of the practice attests to the central importance of the formally unwritten law of State responsibility and its interpretation in investment proceedings. Indeed, investment tribunals refer to this body of law to determine a variety of key issues including whether the acts forming the basis of the claim belong to the respondent state, what are the consequences of a finding against the respondent state, or whether there are circumstances precluding a finding against the respondent state or calling for mitigation. The sheer volume of the practice also raises broader questions about the ways in which investment tribunals engage with the identification and development of unwritten international law, that is, customary international law and general principles of law.

This chapter examines and also critically assesses the methods which investment tribunals explicitly or implicitly employ when using the ARSIWA in order to identify rules of general international law on State responsibility and determine their content. It does so by building upon, and adding to, the work of the UN Secretariat.Footnote ⁵ Section 2 introduces the problem of ARSIWA’s lack of formal status and its implications for the use of ARSIWA in international adjudication. Section 3 surveys whether and how investment tribunals justify their reliance on ARSIWA. Section 4 highlights the variety of ways in which ARSIWA are used in the process of the determination of the content of applicable rules of law. Section 5 discusses the outcomes of this survey against the analytical backdrop of the unity of the law on State responsibility and the law relating to sources of international law. The chapter argues in favour of a principled use of ARSIWA in investment proceedings based on the distinction between the ascertainment of the legal status of a normative proposition contained therein and the determination of the content of a normative proposition whose status is undisputed.

2 Formal Status of ARSIWA and Its Methodological Corollaries

From a ‘formal’ perspective, the ARSIWA, as a document originating from the International Law Commission, does not possess any binding force.Footnote ⁶ In terms of the Statute of the ICJ, the ARSIWA constitutes ‘teachings of the most qualified publicists’ that can be used as ‘subsidiary means for the determination of rules of law’.Footnote ⁷ Yet, in fact, international courts and tribunals tend to attach to ARSIWA much more weight than the label of ‘teachings’ would normally suggest and often treat them as uncontroversial statements of applicable rules of law.Footnote ⁸ This section briefly maps out the available justifications and methodologies for the use of ARSIWA in investment arbitration and points out why the practice of investment tribunals matters.

To start, investment tribunals are constituted for the settlement of a dispute between a State and a national of another State arising out of an investment which the parties have consented to submit to arbitration.Footnote ⁹ Whether investment tribunals can apply in this context also other rules of international law including customary international law and general principles of law is a procedural issue.Footnote ¹⁰ Relevant procedural rules commonly uphold in the first place the autonomy of the parties to determine the applicable law,Footnote ¹¹ but provide residually for the application of ‘applicable rules of international law’ in the absence of an agreement or when the tribunal determines such law to be appropriate.Footnote ¹² Besides, even when the rules of general international law are not deemed directly applicable to a specific issue, a tribunal might decide to take them into account as relevant rules for the interpretation of the applicable IIA.Footnote ¹³ Questions of identification of the international law on State responsibility arise against this procedural background. By implication, investment tribunals turn to ARSIWA for the purposes of identifying rules of international law external to the IIA in question or otherwise applicable to the case. Accordingly, investment tribunals tend to justify their reliance on ARSIWA by using the terminology of ‘formal’ sources of international law, albeit with varying degrees of sophistication.

In the first place, the well-recorded discrepancy between the ‘formal’ status of ARSIWA as a source of law and their effective ‘authority’ in the context of investment arbitration calls for a more detailed survey into how investment tribunals justify their use of ARSIWA.Footnote ¹⁴ With respect to customary international law, the ILC has opined – in a somewhat self-aggrandising manner – that ‘a determination by the Commission affirming the existence and content of a rule of customary international law may have particular value, as may a conclusion by it that no such rule exists’.Footnote ¹⁵ This is so notwithstanding the fact that the ILC outputs cannot constitute evidence of State practice or opinio juris in and of themselves, as they do not originate directly, or even indirectly, from States.Footnote ¹⁶ Moreover, as the late Judge Crawford recounts, the ARSIWA ‘have been derived from cases, from practice, and from often unarticulated instantiations of general legal ideas’.Footnote ¹⁷ This implies that the ARSIWA are not necessarily a monolith from the perspective of sources of international law. Even assuming that some normative propositions included in the ARSIWA do not strictly adhere to the standards of identification of customary international law, tribunals might still have recourse to them as articulations of underlying general principles of law.Footnote ¹⁸ In a nutshell, there are multiple justifications available to investment tribunals for their use of ARSIWA.

Besides, apart from why investment tribunals rely so much on ARSIWA, a closely related question is also how they make use of ARSIWA. In their final form, the ARSIWA consist of provisions articulated in prescriptive terms much like the draft of a treaty.Footnote ¹⁹ It could be argued that an international court or tribunal having recourse to them should approach them in a way akin to any document having binding effect.Footnote ²⁰ In so doing, the court or tribunal should follow a methodology that builds upon the rules of treaty interpretation but also accounts for the fact that the ARSIWA do not originate directly from States but from a technical body of the UN.Footnote ²¹ However, the traditional perception of ILC outputs as ‘teachings’ is inimical to according any particular value to the views of the ILC as such, the ILC being a body of legal experts not of representatives of States.Footnote ²² Rather, a decision-maker should focus on the evidence that the ILC adduces for the existence of a rule and reconstruct the content of the rule in question on the basis of that evidence.Footnote ²³ In more practical terms, the ILC outputs on the topic not only encompass the ARSIWA and their accompanying commentaries, but also a multitude of documents including the previous reports of the Commission, comments by governments, the summary records of discussions within the plenary including the reports of drafting committees, and the reports of the special rapporteurs.Footnote ²⁴ A combined reading of these documents reveals ‘titanic disagreements’ on virtually all issues, which are imprinted in the carefully balanced language of the final text.Footnote ²⁵ In this respect, the traditional label of ‘teachings’ provides little guidance as to how to navigate through all these materials in determining applicable rules of law, as it treats all these materials indistinctly.Footnote ²⁶

In this context of contestation, the premise of this study is that the practice of investment tribunals, as the most frequent users of ARSIWA, can further elucidate the connections between the ARSIWA and the framework of sources of international law, and shed light on the methodology for their proper use. As a preliminary point, the practice of investment tribunals regarding ARSIWA has been paralleled to ‘a drowning man …grab[bing] a stick in the sea in the hope of having certainty’.Footnote ²⁷ More fundamentally, it has been argued that the power of the international judge to resolve an international dispute necessarily entails a certain degree of discretion as to the identification of applicable rules and the determination of their content.Footnote ²⁸ Hence, the tendency of investment to rely on ARSIWA could be dismissed as an instantiation or corollary of such discretion or ‘expediency’ in international judicial decision-making.Footnote ²⁹ Yet, whilst it is arguable that international judges enjoy more leeway than domestic ones in identifying and determining the content of applicable rules of law, they are not entirely uninhibited by any rules or principles.Footnote ³⁰ In resolving competing claims as to the identification and determination of the content of rules of State responsibility, investment tribunals have the incentive –and often do– justify thoroughly their legal findings.Footnote ³¹ Apart from dispelling any impression of bias or arbitrariness, investment tribunals have the strong incentive to pre-empt the annulment of the award or to prevent any domestic obstacles in the implementation of their decision.Footnote ³² Therefore, the practice of investment tribunals engaging with ARSIWA cannot be reduced easily to mere expediency, but could constitute evidence of existing or emerging rules or principles, or at least, good practices, for the identification and interpretation of applicable rules of unwritten international law.

3 Patterns of Justification for the Use of ARSIWA in International Investment Arbitration

At first glance, a majority of investment tribunals give specific reasons for relying on ARSIWA, albeit a significant number of tribunals are silent on the matter. In purely quantitative terms, out of a sample of 205 decisions surveyed for the purposes of this study, 144 provide separately a justification for their reliance on ARSIWA or its previous versions. Conversely, 61 decisions cite the ILC Articles without explicitly providing a reason for doing so. On the one hand, the significant number of decisions that lack any justification for reliance on ARSIWA give support to the argument that the distinction between identification and determination of content is not water-tight not only in theory but also in practice.Footnote ³³ However, a closer look at the reasoning of the tribunals depicts a much more diverse and nuanced picture than a numerical presentation suggests. In some cases, the tribunals’ stance towards the nexus between ARSIWA and the sources of international law becomes apparent from the context of the reference or the decision notwithstanding the lack of an expressis verbis or clear-cut justification. On the other hand, the tribunals provide a wide variety of justifications which do not always consist of a clear link between the ARSIWA and the ‘formal’ source of the applicable rule. Besides, the same decision might follow different lines of reasoning with respect to different provisions of ARSIWA or rely on ARSIWA only partly for the identification of applicable rules on State responsibility.Footnote ³⁴ Mindful of these difficulties, the present subsection attempts to flag up common patterns in the ways in which investment tribunals justify their reliance on ARSIWA, whereas the following subsection focuses on how they use ARSIWA for the determination of the content of the applicable rule.

From the outset, tribunals recognise that the ARSIWA have no formally binding status as such either implicitly or, less often, explicitly.Footnote ³⁵ However, remarkably, this survey has found only one award that explicitly characterises the ARSIWA – and, particularly, the ILC’s Commentary – as ‘works of highly qualified writers’,Footnote ³⁶ despite this characterisation being relatively uncontroversial in theory with respect to works of the ILC.Footnote ³⁷ The underlying reason for this discrepancy seems to be the ensuing discrepancy between the relative value which such sources are to be accorded generally in the determination of applicable rules according to the ICJ Statute and the effective authority of ARSIWA in the context of investment arbitration.

In the first place, tribunals use the ARSIWA in the process of identifying rules stemming from customary international law. In most cases, investment tribunals affirm the applicability of ARSIWA, because they ‘reflect’,Footnote ³⁸ ‘codify’,Footnote ³⁹ ‘state’,Footnote ⁴⁰ ‘restate’,Footnote ⁴¹ ‘express’,Footnote ⁴² ‘formulate’,Footnote ⁴³ ‘articulate’,Footnote ⁴⁴ ‘represent’,Footnote ⁴⁵ or ‘are declaratory of’Footnote ⁴⁶ rules or principles of customary international law on State responsibility. Very often, these findings are couched in axiomatic terms without any further explanation or are reasoned in such vague terms so as to amount to little more than assertions.Footnote ⁴⁷ When they do reason such findings, tribunals tend to uphold the authority of ARSIWA because of the evidence they rely upon,Footnote ⁴⁸ their particular drafting process,Footnote ⁴⁹ or their subsequent reception in practice.Footnote ⁵⁰ In this latter respect, several tribunals have taken note of the fact that the General Assembly has annexed ARSIWA to a resolution and commended them to the consideration of States.Footnote ⁵¹ Other tribunals refer to the pronouncements of other international courts or investment tribunals finding that certain provision of ARSIWA reflect customary international law.Footnote ⁵² Whatever the specific line of reasoning, the common thread between these decisions is the finding that ARSIWA or a specific provision has decisive value for the identification of customary international law on this matter. In practical terms, the normative propositions contained in ARSIWA are treated as having the status of – or, more precisely, as materially identical with – rules of customary international law.

Second, a significant number of decisions use ARSIWA as means to identify rules of general application without explicitly utilising the terminology of customary international law. On the one hand, there are decisions mentioning ARSIWA in the context of identification of general principles of law. In this respect, tribunals usually declare that certain provision of ARSIWA or a statement in the Commentary is generally recognised in domestic legal systems without engaging in any detailed comparative examination or independently assessing its transposability in international law.Footnote ⁵³ On the other hand, quite often, tribunals turn to ARSIWA as means for the identification of international law without deciding or clarifying what is the particular status of the underlying rules. In most cases, it is impossible to discern whether there are any legal reasons for such ambiguity or whether it is just a product of idiosyncratic drafting.Footnote ⁵⁴ However, in some cases, the context of the decision reveals deeper concerns about the applicability of the rules on State responsibility reflected in ARSIWA in the investor-State context.Footnote ⁵⁵ So, for instance, in the Jan de Nul Award, the Tribunal declared that the General Assembly resolution, to which ARSIWA are annexed, ‘is considered as a statement of customary international law on the question of attribution for purposes of asserting the responsibility of a State towards another State’.Footnote ⁵⁶ Despite this finding, it held that ARSIWA was ‘applicable by analogy to the responsibility of States towards private parties’.Footnote ⁵⁷ A similar issue arose in Vestey where Venezuela argued that the principle of full reparation reflected in Art 31 ARSIWA was inapplicable in the case of unlawful expropriation.Footnote ⁵⁸ In response, the Tribunal held that ‘while the ILC Articles govern a State responsibility vis-à-vis another State and not a private person, it is generally accepted that the key provisions of the ILC, such as Article 31(1) can be transposed in the context of the investor-State disputes.’Footnote ⁵⁹ Relying on judicial decisions applying the principle of full reparation in the context of expropriation,Footnote ⁶⁰ the Tribunal concluded that ‘Venezuela must provide full reparation under customary international law’.Footnote ⁶¹ In all these cases, tribunals treat ARSIWA as definitive statements of applicable rules of law, albeit with some ambiguity as to the precise source of such rules. Apart from general principles of law common to domestic laws, it is not apparent whether tribunals apply customary international law or refer to an altogether different category of general principles of law emanating from within international law.Footnote ⁶²

Another strand of decisions seems to take into account the parties’ mutual reliance on ARSIWA in their submissions so as to affirm their applicability in the proceedings. Notably, some tribunals appear to treat the parties’ agreement as the sole basis for the application of a provision of ARSIWA in the proceedings without any finding on whether such provision actually reflects a rule stemming from a ‘formal’ source of international law.Footnote ⁶³ So, for instance, in EDF, the Tribunal found it unnecessary to take a position on ‘the theoretical question of how far the various aspects of ILC Article 25 codifi[ed] customary defenses related to necessity’.Footnote ⁶⁴ The Tribunal took note that ‘both sides in this arbitration stipulate[d] that the Tribunal‘s analysis should take as applicable legal norms the State of Necessity defen[c]e presented by the contours articulated in ILC Article 25’ and found that ‘the standards urged by both sides, as providing applicable norms’.Footnote ⁶⁵ In these cases, the emphasis of tribunals seems to be on the relevance of party autonomy for the determination of applicable law rather than its identification on the basis of the relevant rules of international law. Yet, it could be argued that the parties’ agreement has only evidentiary value as to the status of the rule reflected in certain provision of ARSIWA so as to obviate the need for further independent analysis.Footnote ⁶⁶ So, for instance, the annulment committee in Continental Casualty upheld the legal findings of the Tribunal on applicable law on the basis that ‘it was not disputed by either party that Article 25 of the ILC Articles codified the customary international law principles, and the Tribunal proceeded on this basis’.Footnote ⁶⁷

This overview shows that investment tribunals tend to justify their reliance on ARSIWA by using the terminology of ‘formal’ sources of international law. However, although the vocabulary of ‘formal’ sources is used or alluded to, it can be concluded that investment tribunals do not seem to treat ARSIWA as a monolith in the process of identification of applicable rules. In most cases, tribunals accord ARSIWA decisive value in the process of identification of rules of customary international law on State responsibility. Other tribunals evoke the terminology of general principles of law or are ambiguous in this respect. What is more, tribunals usually avoid wide-ranging conclusions and focus on whether a specific provision of ARSIWA reflects an applicable rule. That said, a noteworthy insight gained from the empirical analysis is that these variations are not limited to certain parts or provisions of ARSIWA. Rather, they exist with respect to a variety of issues such as the rules on attribution of conduct, the breach of an international obligation, the circumstances precluding wrongfulness, or the provisions relating to reparation and implementation of responsibility.

4 Patterns of Interpretation in the Use of ARSIWA in International Investment Arbitration

5 Interpretation as a Balancing Exercise between Centrifugal Forces in International Investment Arbitration and the Unity of Law on State Responsibility

The previous section has identified a variety of ways in which investment tribunals use ARSIWA in determining applicable rules on State responsibility. In the main, investment tribunals favour a formalist approach: they tend to justify their reliance on ARSIWA as means to determine the applicable rules on State responsibility on the basis of the rules on the identification of international law. Moreover, many investment tribunals go even further and proceed to apply, explicitly or implicitly, (meta-)rules or (meta-)principles of interpretation on ARSIWA in order to determine the content of the applicable rule. At the same time, some decisions remain agnostic with regards to the issue of interpretation. This section argues that the fundamental consideration of the unity of the law on State responsibility militates in favour of its uniform application and against a case-by-case approach. The theory of sources of international law provides several footholds for the interpretation of rules of unwritten international law.

To start, the fundamental premise of the law on State responsibility is its unity: ‘every internationally wrongful act of a state entails the international responsibility of that state’.Footnote ¹³⁶ Yet, an agnostic approach as to the methodology for the determination of the content of the applicable rule can severely distort its content. To illustrate this point, in Bayindir, the Tribunal referred to ‘the international rules of attribution reflected in Articles 4, 5 and 8 [ARSIWA]’, which it found applicable ‘as expressing current customary international law’.Footnote ¹³⁷ In its analysis on Article 8 ARSIWA, the Tribunal held:

In the specific case of Article 8 ARSIWA, the ICJ has ruled that the ‘effective control’ test cannot be displaced in the absence of an applicable lex specialis.Footnote ¹³⁹ Yet, at first glance, the Bayindir panel was not obligated to follow the ICJ’s ruling and an inductive examination of the available primary and secondary evidence at the time would have led to conflicting results.Footnote ¹⁴⁰ What is striking in this award is that the Tribunal put aside the much debated ‘effective control’ test purporting that it is a factual issue pertaining to the application of the customary rule. This enabled the Tribunal to infuse its analysis of the content of the applicable rule of responsibility with asides about the speciality of international economic law in a way that runs counter to the fundamental consideration of the unity of the law on State responsibility.Footnote ¹⁴¹ The Bayindir award stands out as an outlier, investment tribunals accepting this premise virtually unanimously. Accepting the premise of the unity of the law on State responsibility, which the ICJ has upheld as a rule of customary international law, militates against a case-by-case approach and reveals the need for a consistent methodology for the determination of the content of rules on State responsibility.Footnote ¹⁴²

Consistently with the mainstream approach concerning the sources of international law, the determination of the applicable rules of the law on State responsibility must take place in principle on the basis of an inductive examination of all available evidence.Footnote ¹⁴³ However, at the same time, a purely inductive approach towards the identification of unwritten international law has certain limitations. So, with respect to the identification of customary international law, the ILC has concluded that ‘the two-elements approach does not preclude an element of deduction as an aid’ particularly ‘when considering possible rules of customary international law that operate against the backdrop of rules framed in more general terms that themselves derive from and reflect a general practice accepted as law or when concluding that possible rules of international law form part of an “indivisible regime”’.Footnote ¹⁴⁴ More emphatically, the current special rapporteur on general principles of law has opined that ‘deduction is …the main criterion to establish the existence of a legal principle that has a general scope’.Footnote ¹⁴⁵ The fact that the ILC perceives deduction as part and parcel of the process of identification of a rule of unwritten international law is somewhat less relevant. The key point is the acknowledgment of a juridical operation analytically distinct from induction that consists of the determination of the content of the applicable rule on the basis of an inference from a normative proposition whose status is undisputed.

To illustrate this point, according to the ILC, the provisions of ARSIWA relating to the content of State responsibility are ‘without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State.’Footnote ¹⁴⁶ Nonetheless, investment tribunals commonly apply the rules on reparation reflected in ARSIWA, even if this involves an element of interpretation as an intermediate step.Footnote ¹⁴⁷ Notably, in Quiborax, the issue arose whether investment tribunals can issue a declaratory award as a form of reparation. The Tribunal referred to Articles 34 and 37 ARSIWA and enunciated that ARSIWA ‘restate customary international law and its rules on reparation have served as guidance to many tribunals in investor-State disputes’.Footnote ¹⁴⁸ It specified that ‘the remedies outlined by the ILC Articles may apply in investor-State arbitration depending on the nature of the remedy and of the injury which it is meant to repair.’Footnote ¹⁴⁹ In this respect, it cautioned that ‘some types of satisfaction as a remedy are not transposable to investor-State disputes’.Footnote ¹⁵⁰ In particular, it held that ‘the type of satisfaction which is meant to redress harm caused to the dignity, hono[u]r and prestige of a State, is not applicable in investor-State disputes.’Footnote ¹⁵¹ The Tribunal concluded, thus, that ‘[t]he fact that some types of satisfaction are not available does not mean that the Tribunal cannot make a declaratory judgment as a means of satisfaction under Article 37 [ARSIWA], if appropriate’.Footnote ¹⁵² In practical terms, the tribunal essentially engaged in the interpretation of Article 37 ARSIWA as a rule of customary international law referring expressly to its wording and its object and purpose. Whether it did so in order to determine its transposability in the context of investor-State arbitration or whether it interpreted it as a directly applicable rule of customary international law is less relevant for practical purposes.

The important point is that the determination of the applicable rules of State responsibility is composed of two analytically distinct operations with ARSIWA being at the crux of the analysis. On the one hand, the determination of the status of a normative proposition contained in ARSIWA involves an inductive analysis of evidence.Footnote ¹⁵³ In this respect, the practice of investment tribunals is an unambiguous attestation that ARSIWA enjoy a ‘présomption de positivité’.Footnote ¹⁵⁴ In practical terms, challenging the status of most normative propositions contained in ARSIWA would require evidence indicating lack of generality of practice/opinio juris or recognition, as the case might be. On the other hand, the determination of the content of a normative proposition contained in ARSIWA also involves an element of interpretation. Specifically, it involves criteria that parallel the process of treaty interpretation. The key difference is that the intention of the drafters of ARSIWA – that is, the ILC – is less relevant in this process because the formal foundation of the normative propositions contained therein is only the consuetudo of States.Footnote ¹⁵⁵ In practical terms, this is reflected in the findings of investment tribunals emphasising the text, context, and object and purpose of ARSIWA or a specific provision at the expense of the multitude of materials leading up to their adoption or even, in case of inconsistency, the ILC Commentary.Footnote ¹⁵⁶ Therefore, the process of interpretation is not an unprincipled process, even if the relevant principles and their interaction are still in a process of elaboration and refinement (not unlike the rules of treaty interpretation before the adoption of the Vienna Convention on the Law of Treaties (VCLT)).

To recap, the premise of the law on State responsibility is inimical to an agnostic approach with respect to the identification and interpretation of the rules on State responsibility. The crucial normative concern is the unmaking of the law on State responsibility through its blending with considerations special to specific sub-systems, in this case, international investment law. In this respect, adherence to ARSIWA is only a starting point. Rather, the key point is that the determination of the applicable rules on State responsibility on the basis of ARSIWA is also a principled process to which interpretation is an inextricable part.

6 Conclusion

Undeniably, investment tribunals spearhead the consolidation of the general law of State responsibility through their widespread endorsement of ARSIWA. This comparative analysis of the use of ARSIWA in investment arbitration has shown that the discrepancy between the current form of ARSIWA and their effective authority should not be overstated. In the main, investment tribunals do justify their reliance on ARSIWA using the vocabulary of the sources of international law. In fact, the formal status of most normative propositions contained in ARSIWA has been tested and analysed from every possible angle by hundreds of investment panels. Whilst admittedly this has led to divergent views as to theoretical points, the preponderance of decisions converges into treating ARSIWA as authoritative statements on the law on State responsibility.

What emerges as a new challenge is ensuring the uniformity of the law on State responsibility within this context of pervasive use. The focus of States, investors, and tribunals seems to have moved away from ‘grand questions of principle’ towards ‘the boring small print’ of responsibility rules like the meaning of control, contribution, injury, causation, or damage.Footnote ¹⁵⁷ In this respect, the traditional approaches on the identification of customary international law and general principles of law have certain limitations. This survey has shown that investment tribunals are increasingly aware that, through their use and elaboration of ARSIWA, they are engaging in the interpretation of the formally unwritten law on State responsibility. The realisation that interpretation is also a principled process guided by international law will ensure the unity and consistent development of the law on State responsibility even within the specialised context of investment arbitration.

In fact, this survey has shown that elements of such a principled methodology are already present in the practice of investment tribunals, even if in incipient form. In the first place, the determination that a normative proposition contained in ARSIWA reflects a rule of customary international law or a general principle of law is only a starting point. This determination entails that the ordinary meaning of the terms of ARSIWA is important in specifying the content of the formally unwritten rule. In this respect, tribunals seem mindful that this is essentially an interpretative endeavour guided by considerations of good faith. Second, another overarching consideration is that rules on State responsibility do not exist in a vacuum but form part of an internally coherent law of State responsibility that should be deemed compatible with the rules and principles of international law which this law is meant to make operational. As a corollary, whilst tribunals tend to confirm the status of a normative proposition contained in ARSIWA in a piecemeal fashion (ie for each provision separately), this does not constitute the end of the analysis. Tribunals also take into account the immediate and broader context of each provision alongside the object and purpose of the entirety of ARSIWA and of each provision within the broader system of ARSIWA when clarifying its content. Third, tribunals seem also to appreciate that the anticipated outcome of this innately interpretative exercise is not the determination of the intention of the drafters of ARSIWA, but the concretisation of rules and principles emanating from the legally relevant conduct of States. Whilst they seem to accord particular value to an ILC’s determination denying binding status to a certain normative proposition, they use materials produced in the run-up to the adoption of ARSIWA only exceptionally and in a supplementary fashion in the context of the interpretation of a normative proposition contained in the ARSIWA.

1 Introduction

The Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA) were intended as the International Law Commission’s (ILC) ‘permanent contribution to general international law’.Footnote ¹ As such, the provisions enshrined therein, including the ‘circumstances precluding wrongfulness’ under Part I, Chapter 5, are in principle binding on, and applicable to, all StatesFootnote ² (generality ratione personae) and apply to the whole field of international obligations of States,Footnote ³ regardless of their content or sourceFootnote ⁴ (generality ratione materiae). This chapter discusses whether, despite this prima facie general applicability, a responding State may be precluded from invoking the customary defence of countermeasures in the context of an investment dispute. It identifies and assesses four factors potentially affecting the availability of countermeasures in investment arbitration: the jurisdictional constraints of the arbitral tribunal, limitations in the law applicable to the dispute, the interpretation of the investment protection treaty in question, and potential limitations to the scope of application of the defence under customary international law.

The jurisdiction of an arbitral tribunal and the law applicable to the dispute are defined by the claim and the treaty in question. The tribunal’s jurisdiction extends only to rulings on the matters raised by the claimant (non ultra petita), based on interpretation and application of the treaty at hand.Footnote ⁵ Nonetheless, many investment treaties authorise the tribunal to decide the issues in dispute, not only on the basis of the treaty itself, but also of ‘applicable rules of international law’.Footnote ⁶

The first task for the tribunal is to determine whether countermeasures are such ‘applicable rules’. This is an interpretative task. The tribunal through interpretation of the investment treaty in question will need to ascertain whether countermeasures as a defence are, explicitly or implicitly, displaced in the context of disputes arising thereunder. For example, the treaty in question may contain rules that constitute lex specialis to the defence of countermeasures under general international law. In such cases, the special provisions prevail over the general, to the extent that they regulate the same subject matter in a different manner.Footnote ⁷ Moreover, it has been argued that the conferral of substantive, direct rights to investors through investment protection treaties implies the non-applicability of the defence of countermeasures. If countermeasures are taken in response to a prior internationally wrongful act of the investor’s home State, then the defence can only preclude the wrongfulness of a temporary non-performance of obligations owed to such State and not of obligations owed directly to the investor, which would, essentially, be a third party to such dispute. In this context, the tribunal shall also take into consideration any relevant rules of international law applicable between the parties,Footnote ⁸ such as the rules under customary international law on the protection of aliens and the institution of diplomatic protection, which may inform the content of relevant treaty provisions.

If the defence is, following this interpretative exercise, found to be applicable to an investment dispute, then the arbitral tribunal is further faced with two jurisdictional considerations. Firstly, the application of countermeasures may require examination of rights and obligations that fall, prima facie, outside its subject matter jurisdiction as established in that dispute, or even outside its jurisdictional field in general.Footnote ⁹ The tribunal would have to determine whether a prior internationally wrongful act has been committed, which would probably constitute a breach of an obligation outside the investment treaty under consideration, and thus, outside the jurisdictional limits of the arbitral tribunal. Secondly, the prior internationally wrongful act would be committed by the State of nationality of the investor and not the investor itself. This raises a Monetary Gold-likeFootnote ¹⁰ consideration regarding the personal jurisdiction of the arbitral tribunal, as the author of the act would not be a party to the proceedings.

This chapter addresses the considerations above in two substantive sections. Section 2 provides an overview of the tribunals’ reasoning and the parties’ arguments in the relevant investment case law. All tribunals that have been seized of this matter rejected the arguments of the respondent on the defence of countermeasures but diverged significantly in terms of reasoning. Thus, arbitral tribunals so far have not provided a definite and consistent answer to the applicability of the defence. Section 3 critically assesses the approach of the tribunals to the application of the lex specialis principle, to the nature of investors’ rights under investment protection treaties and to the limits of their jurisdiction ratione materiae and personae. This chapter argues that the defence of countermeasures under customary international law is indeed applicable in the context of investment disputes and that arbitral tribunals have the power to examine all the requirements of the defence in order to rule on its applicability in a given case.

2 Countermeasures in Investment Case Law: The US–Mexico Sugar War and the Ambivalent Arbitral Practice

The defence of countermeasures in the context of investment arbitration was primarily discussed in three North American Free Trade Agreement (NAFTA)-basedFootnote ¹¹ disputes: Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc v Mexico (ADM), Corn Products International, Inc v Mexico (CPI) and Cargill, Inc v Mexico (Cargill).Footnote ¹² All three disputes arose in the context of the same broader situation of tension between the US and Mexico, which involved proceedings not only before these arbitral tribunals, discussed in this chapter, but also before the WTO Dispute Settlement SystemFootnote ¹³ and NAFTA.Footnote ¹⁴ The disagreement started with the US imposing measures, which restricted the access of Mexico’s surplus sugar produce to the US market. It further escalated by the subsequent failure of the US to take part in the NAFTA dispute settlement proceedings initiated by Mexico with respect to the market restrictions, by blocking the appointment of panelists contrary to NAFTA Chapter Twenty. Mexico proceeded with a series of measures aiming to protect its domestic sugar industry, including a 20% tax on soft drinks using sweeteners which were primarily used by US companies. In response to the US claims that the tax was in breach of its NAFTA obligations, Mexico invoked the defence of countermeasures under general international law, claiming that the tax was lawfully introduced in response to prior violations by the US of its NAFTA obligations regarding the access of Mexican-produced sugar to the US market and dispute settlement proceedings. Three (redacted) awards were issued on this matter by tribunals constituted under the NAFTA dispute settlement provisions.

Even though all three disputes were based on the same factual matrix and the same legal instrument, the three awards have significant differences in terms of reasoning. The proceedings for all three cases took place largely in parallel. The Tribunals in ADM and CPI were unaware of each other’s findings and there are no cross-references between the two awards or engagement with each other’s reasoning. The Tribunal in Cargill received the ADM award during its deliberations along with comments from both sides.Footnote ¹⁵ Thus, the Cargill Tribunal had the opportunity to take into consideration the reasoning of the Tribunal in ADM and engage with its findings on the defence of countermeasures.Footnote ¹⁶

All disputes were submitted to arbitration pursuant to NAFTA Chapter Eleven,Footnote ¹⁷ for alleged violations of, inter alia, the national treatment and expropriation provisions of NAFTA by Mexico.Footnote ¹⁸ The kind of claims that may be submitted to investor-State arbitration under Article 1120 NAFTA are specified in Articles 1116 and 1117, which accordingly, along with the application of the claimant, establish the scope of jurisdiction of the arbitral tribunals.Footnote ¹⁹ Moreover, the tribunals were constituted under the auspices of the International Centre for Settlement of Investment Disputes (ICSID). Under Article 42(1) ICSID Convention, a tribunal should ‘decide a dispute in accordance with such rules of law as may be agreed by the parties.’Footnote ²⁰ In turn, Article 1131(1) NAFTA provides that ‘[a] Tribunal established under this Section shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law.’ Thus, the parties to NAFTA have agreed that general international law is, in principle, within the law that a NAFTA tribunal may apply in the determination of a dispute before it. The provisions on jurisdiction and applicable law were relevant to the discussion of the tribunals regarding the availability of countermeasures to investment arbitration and their power to examine the customary requirements of the defence.

The present section discusses the relevant analysis of the tribunals in the cases of ADM, CPI and Cargill. It outlines the tribunals’ approach to the application of the lex specialis principle, the customary requirements for successful invocation of countermeasures, the nature of investors’ rights under investment treaties and the limits of their jurisdiction ratione materiae and ratione personae.

3 Evaluating the Tribunals’ Approach: Treaty Interpretation, Customary Law and General Principles of International Adjudication

It becomes evident from the analysis above that tribunals have adopted opposing views on issues crucial to the applicability of the customary defence of countermeasures to investor-State disputes. Despite the inconsistencies, through their reasoning and analysis we can identify the main questions and opposing arguments regarding the applicability of defence. This section evaluates the tribunals’ reasoning and discusses the availability of countermeasures to responding States in ISDS in view of the customary rules of treaty interpretation, the lex specialis principle and general principles of international adjudication.

4 Concluding Remarks

Economic restrictions, or the threat thereof, have always been a core foreign policy tool,Footnote ¹⁰⁸ used to enforce international rules, react to illegality, prevent conflict, respond to emerging or current crises or exert pressure towards a change in policy or activity. To the extent that such restrictions are, prima facie, inconsistent with a State’s international obligations, and not lawful (yet unfriendly) acts of retorsion, their imposition must be justified on the basis of an applicable defence, or it will prompt the consequences of international responsibility.Footnote ¹⁰⁹ It is thus essential to clarify whether and under what conditions, restrictions that affect the rights of foreign investors are allowed under the provisions of current investment protection treaties and customary international law.

Given the importance of foreign investment for both the destination and the origin State in terms of economic growth and productivity, and the prime role of investment protection commitments in the bilateral relations of States, the imposition of restrictions affecting the rights of foreign investors can be a powerful tool for the enforcement of the international rule of law. The defence of countermeasures under customary international law recognises the right of States to react to a breach of international obligations by temporarily suspending its own obligations towards the responsible State in order to induce compliance with international law. This chapter discussed whether this customary defence can be invoked in the context of relevant arbitral proceedings in order to preclude the wrongfulness of restrictions that are prima facie contrary to a State’s investment protection obligations. In other words, it aimed to clarify whether suspension of investment protection can be used as a tool to exert pressure on a State that violates international law.

This chapter demonstrated that the defence of countermeasures under general international law is applicable by default to investment disputes, unless interpretation of the investment treaty in question suggests otherwise. On the nature of investors’ rights, on which much ink has been spilled in the academic literature, it was argued that they are not detached from the inter-State relations of the home and the host State. Customary international law on the protection of aliens and the institution of diplomatic protection informs the content of current investment treaties and suggests that the protections enshrined therein are an extension of such customary law, complemented by a procedural right to initiate proceedings without the involvement of the State of nationality. The text and context of investment treaties provides further support to this argument. Lastly, this chapter demonstrated that the power of an adjudicative body to rule on all indispensable incidental matters that arise in the context of an applicable defence is inherent. Findings on such incidental matters form part of the reasoning of the tribunal and have no independent legal force. Thus, the limited scope of an arbitral tribunal’s subject matter jurisdiction and the absence of the State of nationality of the investor from the proceedings do not preclude the examination of the defence of countermeasures.

In view of the above, this chapter concludes that the customary defence of countermeasures is indeed available to responding States in international investment proceedings. A host State is entitled under general international law to react to another State’s breach of an international obligation by temporarily suspending its protection of the latter’s investors within its territory, in accordance with the requirements for a lawful countermeasure under customary international law. Such countermeasures can be a powerful arrow in the quiver of States that can be used to ensure the effective implementation of international responsibility.

1 Introduction

According to Article 27(b) of the Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA), the successful invocation of a defence is ‘without prejudice … to the question of compensation for any material loss caused by the act in question’.Footnote ¹ The Commentary to this provision clarifies that this compensation is not part of the framework of reparation: it is not, in short, one of the obligations arising out of the wrongful act.Footnote ² It concerns, instead, the question whether a State invoking a defence ‘should nonetheless be expected to make good any material loss suffered by the State directly affected’.Footnote ³ Material loss, the Commentary continues, is a narrower concept than damage as it concerns only the adjustment of losses that may occur when a party relies on a defence.

Beyond this, the Commentary gives little guidance as to when such a duty could be owed. It states that in certain situations a duty of compensation ‘is a proper condition’ for allowing reliance on a defence, as otherwise a State might shift the burden of protecting its own interests onto other ‘innocent’ third parties.Footnote ⁴ By way of example, it notes that Hungary accepted this principle when relying on the plea of necessity in Gabčíkovo-Nagymaros.Footnote ⁵ But the Commentary does not say in respect of which defences, and in what circumstances, compensation will be due. Indeed, it does not say that compensation is due in cases of necessity; it only notes that Hungary offered compensation when invoking necessity. Indeed, the Commentary clarifies that it ‘does not attempt to specify in what circumstances compensation should be payable’.Footnote ⁶ The most that it offers, by way of guidance, is that it will be for the parties involved to agree on any possible compensation.Footnote ⁷

It is not unusual for parties who benefit from the plea of necessity to offer compensation to affected parties. Hungary, as noted by the ILC, did it in Gabčíkovo-Nagymaros and, more recently, Bolivia may be seen as having made a similar offer in an investment arbitration.Footnote ⁸ But such instances are certainly not the norm. In most instances, no offer of compensation will be forthcoming and, consequently, there will be no agreement between the parties. What happens, then, when the parties do not agree on any possible compensation for material loss? What happens when, as has most often been the case in practice, the State invoking a defence rejects that it owes compensation to the affected party? It is precisely here that the question whether compensation is owed, as a matter of obligation, arises.

For the most part, investment tribunals have had to address situations in which offers of, or agreements on, compensation for material loss caused by acts adopted in a state of necessity have not been forthcoming. At least four different States have relied on the defence of necessity to justify,Footnote ⁹ and thus, render lawful conduct incompatible with their obligations under bilateral investment treaties.Footnote ¹⁰ In all cases the claimants have appealed to ARSIWA Article 27(b) and argued that, notwithstanding the necessity defence, respondents were required to compensate them for the material loss suffered as a result of the allegedly justified measures. All States denied owing such compensation.

Are these States required to compensate claimants for the loss caused by their justified, and therefore lawful, conduct? Absent the parties’ agreement, an obligation to make compensation in these circumstances requires a basis in positive law. This compensation, as the ILC Commentary to Article 27 clarifies,Footnote ¹¹ is not a form of reparation; after all, there has been no wrongful act. So, it cannot be based on the obligation to make reparation that arises for States as a consequence of a wrongful act. It must have a discrete legal source. Investment tribunals, deciding in accordance with international law needed, therefore, to identify a positive law basis for the respondent’s duty to compensate material loss resulting from acts justified by necessity.

A duty of compensation could be found in the relevant applicable treaty: the treaty may specifically provide for this.Footnote ¹² Investment tribunals have also interpreted such a duty from the purpose of the Bilateral Investment Treaties (BITs) themselves. Thus, the Tribunal in BG Group found that a duty of compensation in these circumstances could be required by the UK–Argentina BIT.Footnote ¹³ But this is relatively rare. Most treaties do not make provision for compensation in relation to emergency measures and, when they do, they often provide for compensation in only a limited range of cases. In all other cases, therefore, a tribunal will need to look to other sources of international law: customary law or general principles of law. The focus of this chapter is the tribunals’ engagement with customary international law in their assessment of the existence of an obligation to make compensation for material loss caused by acts justified under the plea of necessity. As will be seen, tribunals have reached opposite conclusions on the existence of a duty of compensation. However, they all share in common one feature: an omission to engage with the method of customary law identification. Some tribunals assert the existence of the duty, others derive it from the elements of the customary defence of necessity, yet others still simply name-check precedents and general principles of law. But none of these awards provided any evidence of practice and opinio juris in relation to this duty.

In addition to this introduction, the chapter proceeds in three steps. Section 2 provides an overview of the investment case law. It will review the range of conclusions reached by different investment tribunals and, in so doing, focus on the reasoning deployed to reach those conclusions. It will show that, whether they accept or reject the existence of a duty of compensation, their reasoning does not involve any engagement with the elements of customary law. At most, tribunals offer vague references to previous precedents and case law, and never once to State practice and opinio juris. Section 3 will then focus on analysis: it reviews the available practice and opinio juris, limited as it is, and assesses the precedents invoked in support of the duty of compensation by these tribunals. As will be seen, the practice is scant and inconsistent and the precedents invoked are at best equivocal as to the existence of a duty of compensation. If States have expressed any opinio in this regard this is an opinio non juris: there is no customary obligation to make compensation in cases of necessity. Section 4 concludes.

Two clarifications are necessary before proceeding. First, this chapter takes an orthodox approach to the identification of customary law, in line with the so-called ‘two element theory’ followed by the ILC in its recent work on customary law and supported by States in connection with that work.Footnote ¹⁴ In light of this, it will focus first and foremost on identifying existing practice and opinio juris of States in respect of the duty of compensation. The article will also take into account the case law of international tribunals. This is because while international courts and tribunals do not have a formal role in the development of international law, in practice, decisions of international tribunals can influence the development of international law, including the law of State responsibility and the law of investment protection.Footnote ¹⁵ Second, this chapter will take necessity as a justification, namely, as a defence which renders conduct lawful, and not as an excuse, namely, as a defence which excludes the consequences of a wrongful act.Footnote ¹⁶ The reasons for this choice are that the majority of States who support this defence at international law classify it as a justification, and that States have invoked it in international courts and tribunals as such.Footnote ¹⁷

2 Investment Tribunals and the Duty of Compensation

Several States have invoked the plea of necessity in investment treaty arbitration. In most (if not all) of these instances, the parties have addressed the question of compensation in the event that the State’s plea of necessity was successful. Likewise, in most instances, tribunals have addressed the duty of compensation in obiter only: respondents’ plea of necessity having been unsuccessful on other, often multiple, grounds. Many tribunals have not addressed the question of compensation at all: having rejected the plea of necessity on other grounds, there was no need to consider this issue.Footnote ¹⁸

Tribunals’ approaches to the duty of compensation have varied significantly, covering the full range of possibilities: some have accepted the existence of this duty, others have denied it, and others still have not taken a position. They have all had in common, however, minimal or no engagement with the evidence of the (potential) positive law source of this duty. In particular, none of these tribunals have applied the orthodox method (or any other method, for that matter) for the identification of customary law: tribunals have instead resorted to simple assertions, deductions, and denials. The next four sections review the different approaches taken by investment tribunals.

3 Doing the Homework: What Evidence for a Customary Duty of Compensation?

Tribunals’ divided opinions on this point are not unique. Far from it. Scholars are equally divided on the existence of a duty of compensation in cases of necessity. Thus, some scholars have argued that international law recognises an obligation to provide compensation in these cases,Footnote ⁵³ whereas others have expressed doubts as to the existence of this duty.Footnote ⁵⁴ Many of these scholars, however, regardless of their views on the existence, in positive law, of this duty, agree that compensation would be fair in such circumstances.Footnote ⁵⁵

In the case law and the literature on this topic, arguments as to the existence of a customary duty of compensation usually rely, as evidence, on the ILC’s drafting of, and Commentary to, Article 27(b), and the case law.Footnote ⁵⁶ As will be seen in the next two sections, however, the evidence in support of this duty is far from clear. Regardless of how one interprets the ILC’s work on, and the Commentary to, Article 27(b), only a handful of States commenting on the draft expressly supported a duty of compensation generally, or in cases of necessity specifically. Indeed, the evidence of practice and opinio juris in favour of this duty is scant and vague (Section 3.1), and the precedents relied upon by tribunals and scholars alike to evidence the existence of the duty of compensation are equivocal at best (Section 3.2).

4 Assessment

Investment tribunals have tackled the question of compensation in cases of necessity in numerous cases. Their conclusions on the point (almost always in obiter) are as varied as the reasoning behind them. A common thread among them is that they have, for the most part, failed to assess the positive law basis for the existence (or non-existence) of the duty of compensation. Only a handful of decisions name-check some precedents and cases, but none of them in any way refer to State practice or opinio juris.

To be sure, the question of compensation in cases of necessity is a philosophically and theoretically difficult one, having troubled legal scholars and theorists for many centuries.Footnote ¹⁴⁵ It is a question that elicits intuitive and often strongly held opinions: it would be unfair for the affected party to bear the burden of the protection of others’ interests. In short, it would be unfair to let the loss lie where it falls. And yet, the action that causes the loss is a permitted one, it is lawful behaviour, and under normal circumstances, we would not expect those acting lawfully to compensate losses caused by their actions. In the absence of a wrong, losses do lie where they fall: herein lies the dilemma at the heart of the duty of compensation. And yet, necessitated acts seem different from other lawful acts that cause loss. Indeed, necessitated acts have a baggage that other lawful acts do not: they evoke moral hazard and, in the history of international law, they evoke abusive behaviour by powerful States.

This baggage explains the intuitive perceptions of unfairness at the allocation of loss onto the affected party, and the support for a re-distribution of the loss onto the agent. It may also explain, at least partly, why investment tribunals have been sympathetic to the idea that States invoking necessity owe a duty of compensation to the affected parties. But this is no justification for these tribunals’ omission to engage with the methods of law ascertainment: aside from the fairness and justness of the duty of compensation, is there evidence that this is required by positive law; is there evidence, in particular, of practice and opinio juris about the existence of this duty? As shown, there is not only limited practice and opinio juris on this duty, but the few precedents cited in investment decisions do not support, nor do they provide evidence of, the existence of a duty of compensation. The nobility of the sentiment is no substitute for the absence of positive law on the existence of this duty. Indeed, in asserting or deducing the duty of compensation in this manner, investment tribunals are closer to deciding the matter ex aequo et bono, for which they would need specific consent by the parties, than by application of the rules of international law, as they are mandated to do.

1 Introduction

It is perhaps trite to say that the principle of ‘full reparation’, enunciated by the Permanent Court of International Justice (PCIJ) in the Chorzów Factory case, has been widely recognised as the customary rule governing the reparation of internationally wrongful acts.Footnote ¹ According to that judgment, where restitution is unavailable or insufficient, customary law requires the payment of compensation in the form of ‘a sum corresponding to the value which a restitution in kind would bear [and] 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’.Footnote ² Whilst the rights of private entities are ‘on a different plane’ to those belonging to States, the damage suffered by an individual affords ‘a convenient scale for the calculation of the reparation due to the State’,Footnote ³ so the extent of the individual injury affords the metric for the calculation of damages at the inter-State level.

The International Law Commission (ILC) took Chorzów Factory as the basis for the elaboration of the rules governing the consequences of wrongful acts in the 2001 Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA).Footnote ⁴ In the Commentary to Article 31, the ILC explained that ‘[t]he responsible State’s obligation to make full reparation relates to the “injury caused by the internationally wrongful act”’.Footnote ⁵ If restitution is unavailable or insufficient, ‘[t]he role of compensation is to fill in any gaps so as to ensure full reparation for damage suffered.’Footnote ⁶ Article 36 ARSIWA then states that ‘[t]he 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’, damage being understood as ‘any financially assessable damage including loss of profits’.Footnote ⁷ Given that most Bilateral Investment Treaties (BITs) are silent as to the remedies applicable in case of their violation, investment tribunals have referred to Article 36 ARSIWA as reflecting the applicable standard of compensation,Footnote ⁸ and have recognised Chorzów Factory as an ‘authoritative description’ of customary law on the subject.Footnote ⁹

In line with the Chorzów Factory standard, the determination of compensation seems to operate within three governing parameters.Footnote ¹⁰ First, the identification of the extent of the damage (material or moral) as a question of fact.Footnote ¹¹ Second, the establishment of a sufficiently direct and certain causal nexus between the damage and the internationally wrongful act.Footnote ¹² Third, the quantification, in monetary terms, of any ‘financially assessable’ damage through the application of an appropriate valuation methodology.Footnote ¹³ The final amount of compensation will vary depending on permutations of these factors. Conversely, factual or legal considerations beyond these parameters are generally deemed irrelevant to quantum.Footnote ¹⁴

Within this conceptual framework, strongly influenced by private-law analogies from municipal tort law,Footnote ¹⁵ compensation has acquired a strong, ‘damage-centric’ focus, in the sense that it depends primarily – if not exclusively – on the demonstration of a financially assessable damage and a ‘sufficiently direct and certain causal nexus’ between the damage and the wrongful act.Footnote ¹⁶ Thus, at the final stages of its codification efforts the ILC decided to omit from the text of ARSIWA any provision allowing for extraneous factors to be taken into account in the determination of compensation beyond damage and causality, such as aggravating or mitigating circumstances, the gravity of the act, or limitations relating to proportionality.Footnote ¹⁷

A perusal of international jurisprudence, however, paints quite a different picture. In fact, early arbitral commissions,Footnote ¹⁸ the International Court of Justice (ICJ),Footnote ¹⁹ the Iran-US Claims Tribunal,Footnote ²⁰ ad hoc inter-State tribunals,Footnote ²¹ as well as regional human rights courts,Footnote ²² have referred to equity (or, interchangeably, ‘equitable considerations’Footnote ²³) as a normative proposition capable of affecting the determination of damages in ways not expressly contemplated in Chorzów Factory. Investment tribunals have followed a similar path, invoking equitable considerations for the determination of compensation due for violations of BIT provisions.Footnote ²⁴ What this means in practice is unclear: despite the frequent invocation of equity for the purposes of determining compensation, international courts and tribunals have made little effort to explain the legal basis of these considerations or their underlying methodology.

Arguably, the integration of equitable considerations in quantum analysis presents some significant advantages. From a procedural point of view, it allows for some flexibility in the fact-gathering process and enables the tribunal to award compensation even when objective circumstances preclude the injured party from producing sufficient evidence to substantiate its loss. The ICJ, for example, has invoked equitable considerations for the determination of compensation where the evidence was insufficient to enable a precise quantification, for ‘it would be a perversion of fundamental principles of justice to deny all relief to the injured person, and thereby relieve the wrongdoer from making any amend for his acts.’Footnote ²⁵ From a substantive point of view, the rigid or mechanical application of customary rules governing compensation might also lead to a juridical outcome that places too strong an emphasis on the extent of the injury caused by the wrongful act, in a manner disconnected from the context in which the injury arose, the nature of the unlawful act, or the respective interests and conduct of the parties. Thus, the application of equity to compensation enables the tribunal to ‘infuse’ elements of reasonableness and ‘individualized justice’ in its reasoning,Footnote ²⁶ and arrive at a balanced outcome that accommodates the interests of both parties.

Be that as it may, equitable considerations may also give rise to complications in practice. In fact, an unprincipled application of equity to compensation may have serious repercussions for the legitimacy of the dispute settlement procedure. It might also affect the procedural rights of the parties and, ultimately, undermine the integrity of the decision itself. This complexity is exemplified in the International Centre for Settlement of Investment Disputes (ICSID) framework where ad hoc annulment committees have stated that if a tribunal misapplies the legal rules in favour of a settlement based on ‘general equity’, the award might be subject to annulment for manifest excess of power or a failure to state adequate reasons, within the meaning of Article 52(1)(b) and (e) of the Washington Convention.Footnote ²⁷

Outside the ICSID framework, the application of equitable considerations may also give rise to challenges to recognition and enforcement of arbitral awards. For instance, States have challenged the validity of arbitral awards relying upon equitable considerations before domestic courts, portraying them as attempts at awarding punitive damages in a manner contrary to international law.Footnote ²⁸ Conversely, some municipal courts have attempted at re-opening certain arbitral awards, especially with regard to questions of compensation, invoking ‘equity’, ‘fairness’ or ‘proportionality’ as the legal basis for their judicial review.Footnote ²⁹ This development may have serious implications for the finality of arbitral awards: a broadly-construed conception of ‘equity’ for quantum purposes may in fact be used as the trojan horse to re-open arbitral proceedings and substitute a tribunal’s decision for the views of domestic courts, especially where large monetary awards are at stake.

In light of these challenges and the risk of protracted proceedings, it is imperative to develop an analytical framework for the operation of equity in the determination of compensation by investment tribunals. Against this background, this chapter argues that while investment arbitral tribunals are entitled to apply equitable considerations when determining compensation as a general principle of international law, this possibility is restrained by certain limitations beyond which the award might result in a legal error or an excess of powers. To that end, Section 2 will distinguish between the different forms that equity may take and examine the interpretative function of equity in the framework of compensation. Section 3 will examine the interpretative function of equity in the framework of customary norms of State responsibility, whereas Section 4 will argue that recourse to equity is subject to intrinsic and extrinsic limitations, emanating either from the nature of equity as an interpretative canon or from the procedural framework in which tribunals are bound to operate, respectively.

A few words are in order on the scope of this chapter. For analytical purposes, the term ‘compensation’ should be understood as a pecuniary remedy for the reparation of injury caused by an internationally wrongful act within the meaning of Articles 31 and 36 of ARSIWA. The relationship between equity and other forms of remedies, such as restitution or satisfaction, fall outside the scope of the analysis. In the same vein, equity may also have a bearing on the determination of ‘compensation’ that is due upon liability for injurious, yet lawful acts. Indeed, there are numerous treaty provisions that require the payment of ‘fair’, ‘equitable’ or ‘just’ compensation for acts that are not prohibited by international law, such as the expropriation of foreign investmentsFootnote ³⁰ or the civil liability of economic operators for the harm caused to persons or the environment by hazardous or ultrahazardous activities.Footnote ³¹ Nevertheless, the interpretation of these treaty-specific provisions is a question of primary, not secondary, norms, which are subject to distinct rationales and present structural legal differences when compared to State responsibility. Thus, the meaning of equity within these treaty-specific regimes falls to be determined by reference to their distinctive teleologies and contextual specificities. Finally, even though equitable considerations are frequently integrated in computational models proposed by valuation expertsFootnote ³² and the methodology employed by tribunals,Footnote ³³ this chapter will only address the legal function of equity, as opposed to the use of equity in the process of valuation methodologies.

2 The Legal Basis for the Application of Equity to Compensation

Doctrinal analysis of the concept of equity typically begins with some preliminary questions regarding the normative character of equity and its functions in general international law. It is not, however, the purpose of this chapter to revisit the doctrinal debate surrounding the normativity of equity.Footnote ³⁴ Suffice to say that, throughout the twentieth century, the development of international law has transformed equity from a non-legal conceptFootnote ³⁵ to a general principle of law within the meaning of Article 38(1)(c) of the PCIJ and later ICJ Statute.Footnote ³⁶ As early as 1920, the Advisory Committee of Jurists, tasked with the preparation of the draft Statute for the PCIJ, understood equity as an integral part of international law to be applied by the World Court,Footnote ³⁷ a point subsequently endorsed by the overwhelming majority of scholars and jurisprudence.Footnote ³⁸

Nevertheless, investment tribunals have not clearly articulated the legal basis for the application of equitable considerations to the assessment of damages. In LIAMCO, for example, the tribunal confusingly referred to equity as a ‘general principle of law’ under Article 38(2) of the ICJ Statute, instead of Article 38(1)(c).Footnote ³⁹ In the same vein, the Aminoil Tribunal stated that ‘redress will be ensured ex aequo et bono’ without ‘depart[ing] from principles of law’, in plain contradiction to the terms of Article 38(2) of the ICJ Statute.Footnote ⁴⁰

It is, however, clear, that the application of equity as a general principle of law should not be confused with a decision ex aequo et bono. In the North Sea Continental Shelf cases, the ICJ drew a distinction between the power of the Court to settle disputes ex aequo et bono and equity as an integral part of international law (equity intra legem).Footnote ⁴¹ In Tunisia/Libya, the Court explained that ‘the legal concept of equity is a general principle directly applicable as law.’Footnote ⁴² The Court, ‘whose task is by definition to administer justice is bound to apply it.’Footnote ⁴³ By contrast, dispute-settlement ex aequo et bono entails that a tribunal may act as an amiable compositeur for the ‘adjustment of the respective interests’ of the parties.Footnote ⁴⁴ While the latter function requires express agreement by the parties (Article 42(3) of ICSID),Footnote ⁴⁵ the former is not simply ‘a matter of abstract justice’, but a rule of law capable of generating legal obligations between States.Footnote ⁴⁶

Within the framework of intra legem equity, the ICJ has drawn a further distinction between equity praeter and infra legem.Footnote ⁴⁷ Equity praeter legem acquires an autonomous normative function in case of lacunae, ‘in order to remedy the insufficiencies of international law and fill in its logical lacunae.’Footnote ⁴⁸ Conversely, infra legem equity consists in ‘a method of interpretation of the law in force, and is one of its attributes.’Footnote ⁴⁹ Leaving aside doctrinal objections against the traditional typology of equity,Footnote ⁵⁰ this analysis will not focus on the praeter legem of equity: to the extent that the Chorzów Factory standard has received wide-spread acceptance in State practice and jurisprudence as reflecting customary law, it seems untenable to speak of a general ‘gap’ in State responsibility to which praeter legem equity could apply,Footnote ⁵¹ although it may always be possible to identify smaller gaps to which praeter legem equity may be of relevance.

Rather, it is the interpretative function of equity that is most pertinent to the customary rules governing the determination of compensation.Footnote ⁵² Thus, in Amco v Indonesia the ICSID annulment committee dismissed the idea that any mention of ‘equitable considerations’ in the award would necessarily amount to a decision ex aequo et bono, and accepted that equitable considerations may ‘form part of the law to be applied by the Tribunal’ for the purposes of compensation.Footnote ⁵³ In Dogan v Turkmenistan the annulment committee also stated that equitable considerations were ‘inherent (…) in the interpretation of the law applied by the Tribunal.’Footnote ⁵⁴ The committee in MTD v Chile developed this point further, stating that a tribunal is entitled to ‘tak[e] into account considerations of fairness in applying the law’, given that ‘individual rules of law will often require fairness or a balancing of interests to be taken to account.’Footnote ⁵⁵

These propositions align with the general understanding of the hermeneutical function of equity as intimately linked with the requirements of good faith and reasonableness. Following a long tradition of jurists,Footnote ⁵⁶ Schwarzenberger postulates that equity demands ‘reasonableness and good faith in the interpretation and application of treaties’.Footnote ⁵⁷ For ‘[e]ven in a relatively static environment, the need arises sooner or later to soften the harshness of jus strictum by the infusion of elements of equity and elasticity.’Footnote ⁵⁸ In the same vein, certain authors have argued that equity may ‘soften’ or ‘temper’ the strict application of positive rules, by ‘infusing elements of reasonableness and ‘individualised’ justice in their interpretation, whenever the applicable law leaves a margin of discretion’,Footnote ⁵⁹ or as a ‘a normative flexifier [sic] mitigating the rigidity of application of positive international law’.Footnote ⁶⁰

Insofar as infra legem equity has been mostly theorised at the level of treaty interpretation, the question arises whether its interpretative function extends to customary rules. In this regard, academic authors have raised a series of doctrinal objections against the possibility of interpreting customary norms as such, pointing towards the absence of a written text that could be analysed through the ordinary means of interpretation.Footnote ⁶¹ Without further delving into this wider doctrinal debate, it is sufficient to note that the applicability of infra legem equity to compensation has been relatively uncontested in practice: thus, in the Armed Activities case the ICJ made several references to equitable considerations at the reparations stage, and several judges acknowledged that recourse to equitable considerations in determining compensation ‘is an application of equity infra legem’.Footnote ⁶² In Total v Argentina, the tribunal also noted that ‘[e]quitable considerations in the application of the law, including in performing calculation of damages, pertain to aequitas infra legem (…) and not aequitas praeter legem to use a Latin expression (equity within what the law admits)’.Footnote ⁶³ Indeed, if infra legem equity can affect the interpretation of treaty-based rules, it stands to reason that it can also affect the interpretation of customary norms, which are framed at such level of generality that a further deductive process is required to particularise their content and meaning to the circumstances of each case.Footnote ⁶⁴ The question, therefore, is not about whether equitable considerations may apply to the interpretation of customary law in abstracto, but rather about how that process comes to bear.

3 Lost and Found: Equitable Considerations in the Law of State Responsibility

Heretofore, academic authors have approached the principle of equity through the lens of primary rules governing inter-State relations, ranging from maritime boundary delimitationFootnote ⁶⁵ to the exploitation and management of natural resources,Footnote ⁶⁶ the ‘fair and equitable treatment’ standard in BITs,Footnote ⁶⁷ or the law of the WTO.Footnote ⁶⁸ By contrast, much less attention has been paid to the question whether – and if so, how – equity may affect the interpretation of secondary norms governing the consequences of wrongful acts,Footnote ⁶⁹ even less so compensation.Footnote ⁷⁰ As noted by Milano, the function of equity in the identification of remedies for wrongful acts

However, recourse to equitable considerations for compensation purposes is not new.Footnote ⁷² States have instructed arbitral tribunals and mixed claims commissions to apply ‘equity’ to the assessment of damages arising from foreign claims as early as the 1794 Jay Treaty, where the US and Great Britain mandated the umpire to settle their claims to compensation on the basis of ‘justice, equity and the law of nations’. But even where equity was not expressly mentioned in the arbitral agreement, this did not prevent arbitrators from invoking equity proprio motu for the determination of compensation.Footnote ⁷³ Even though some of these early decisions were rendered ex aequo et bono,Footnote ⁷⁴ some other tribunals invoked equity within the framework of legal reasoning, either as the normative basis for allowing a claim (praeter legem),Footnote ⁷⁵ or as a legal principle capable of influencing the interpretation of customary law (infra legem).Footnote ⁷⁶

Eventually, the concept of equity found its way into the codification efforts of the ILC on the law of State responsibility. Originally, the 1930 Preparatory Committee of the Hague Conference stated in its ‘Basis for Discussion No. 29’ that ‘[r]esponsibility involves (…) an obligation to make good the damage suffered in so far as it results from failure to comply with the international obligation.’Footnote ⁷⁷ This standard echoes the conventional understanding of the Chorzów Factory judgment that had been rendered by the PCIJ just the previous year. As early as 1956, however, Special Rapporteur Garcia-Amador recognised that, apart from the remedial function of compensation, there may also be some ‘attenuating’, ‘extenuating’ or ‘aggravating’ circumstances that can affect the extent to which a State is bound to compensate for injury caused to aliens in its territory.Footnote ⁷⁸ This position, which signalled a departure from Chorzów Factory, became clearer in his subsequent reports, where he noted that, while

Special Rapporteur Ago did not submit a report on the consequences of internationally wrongful acts before his election to the ICJ. However, when discussing his eighth report on the circumstances precluding wrongfulness, several ILC members observed that, while certain circumstances may not preclude the wrongfulness of an act qua, they may nonetheless operate as mitigating factors for the purposes of reparation.Footnote ⁸⁰ Special Rapporteur Ago acknowledged this pointFootnote ⁸¹ and the commentary to draft Chapter V stated that circumstances precluding wrongfulness ‘must not be confused with other circumstances which might have the effect not of precluding the wrongfulness of the act of the State but of attenuating or aggravating the responsibility entailed by that act’, with regard to the content, form and degree of responsibility.Footnote ⁸² Even though neither Rapporteur expressly referred to ‘equity’ as the legal basis, they both acknowledged that it was possible for compensation to take into account not only the extent of the injury caused by the wrongful act, but additional factors as well.

The following year, Special Rapporteur Riphagen argued in favour of a ‘qualitative’ and ‘quantitative’ degree of proportionality between the characteristics of the unlawful conduct and the consequences in response thereto, including the level and amount of compensation.Footnote ⁸³ Notably, since the North Sea Continental Shelf cases the ICJ has drawn a connection between the application of equitable principles and a ‘reasonable degree of proportionality’ to be observed by the respective decision-maker.Footnote ⁸⁴ In the course of the debate on Riphagen’s report, the principle of proportionality was expressly endorsed by some ILC membersFootnote ⁸⁵ (notably in the context of compensationFootnote ⁸⁶) but met with scepticism from others.Footnote ⁸⁷

Equitable considerations resurfaced with greater force at the last stages of the codification process. In his first report to the ILC, Special Rapporteur Arangio-Ruiz described the Chorzów Factory principle as too vague or sweeping a proposition, which does not settle all of potential legal issues involved, such as the ‘relevance of the injured State’s conduct’, of the ‘gravity of the wrongful act’ or the ‘degree of fault of the offending State’.Footnote ⁸⁸ The following year, however, he explained that ‘[h]e had omitted express references to equity from the report because, as experience showed, such references were apt to be unhelpful. Needless to say, however, equity was implied in all legal rules and formed an essential and integral part of law.’Footnote ⁸⁹ In his opinion, equity was intimately linked to the relevance of fault, wilful intent or negligence for the purposes of compensation.Footnote ⁹⁰ In the same vein, other ILC members raised the question of the onerousness of the financial obligation upon the obligor State as an equitable consideration that could justify a proportional reduction of damages in some cases.Footnote ⁹¹ The Special Rapporteur expressly acknowledged the role of equity in the assessment of damages, but noted that ‘it might be dangerous to refer expressly to [equity], since it was part and parcel of law and of any legal decision’.Footnote ⁹² Still, the original Commentary to Article 6bis stated that:

It was, therefore, understood that the customary standard of full reparation could be balanced against equitable considerations, which could reduce the extent of reparation, including the amount of compensation. In his third report to the ILC, Special Rapporteur Crawford observed that international jurisprudence reflected

When international judges are making a complex judgment such as one regarding the amount of compensation, he observed, ‘equitable considerations will inevitably be taken into account, whether acknowledged or not.’Footnote ⁹⁵ He warned, however, that, ‘while illustrations can be given of the operation of equitable considerations and of proportionality in international law, the attempt to specify them in detail is likely to fail.’Footnote ⁹⁶ Given that the ILC was anxious to conclude its codification work before 2001, the Special Rapporteur made no effort to define ‘equitable considerations’ in detail. But the general proposition made it to the final commentary to Article 36 of ARSIWA (albeit with diluted wording), stating that:

It follows that the ILC understood that the customary standard of ‘full reparation’ would not always provide satisfactory solutions and that international tribunals could have recourse to equity, as a general principle of law, for the adjustment of compensation in such a way as to reflect additional factors, such as the parties’ conduct and situation, the content of the primary norm breached, or an evaluation of their respective interests. While most Special Rapporteurs acknowledged the relevance of equity for compensation (including under the rubric of proportionality), it was agreed not to insert an express qualification to the text of the draft articles. However, far from discounting the relevance of equity in favour of a mechanical approach to quantum, the ILC suggested that infra legem equity forms part-and-parcel of the secondary rules of State responsibility and may have a bearing on the level of compensation. This proposition, reflected in the final commentary of ARSIWA after more than 50 years of discussions and buttressed by the contemporaneous and subsequent practice of courts and tribunals, is of key import for the interpretation of the rules governing compensation.Footnote ⁹⁸

4 Equitable Considerations in Investment Arbitration: Is There a Limit?

In line with the preceding analysis, investment tribunals have, expressly or impliedly, applied equitable considerations to the determination of compensation payable in case of unlawful acts. As early as 1982, for example, the Aminoil Tribunal observed that ‘any estimate in money terms of amounts intended to express the value of an asset, of an undertaking, of a contract, or of services rendered, must take equitable principles into account’.Footnote ⁹⁹ In Amco v Indonesia, the committee further stated that ‘a tribunal applying international law may take account of equitable considerations in non-maritime boundaries cases’, such as compensation.Footnote ¹⁰⁰

While this proposition is generally accepted in the literature,Footnote ¹⁰¹ there seems to be no consensus as to what these ‘equitable considerations’ might be. Commentators, practitioners and tribunals alike have proffered a wide range of factors capable of influencing quantum (well beyond the Chorzów formula), albeit not always invoking equity as the relevant legal basis. On the one hand, it has been suggested that equitable considerations may justify an aggravated amount of compensation, in order to reflect the ‘seriousness’ or ‘gravity’ of the unlawful act,Footnote ¹⁰² or the subjective intent (or fault) of the wrongdoer State.Footnote ¹⁰³ Similar considerations, however, evoked serious objections within the ILC during the codification process that led to the ARSIWA: despite the original proposals to enable damages reflecting the gravity of the breach,Footnote ¹⁰⁴ the ILC eventually rejected the idea that compensation be used as a vehicle for the introduction of punitive damages.Footnote ¹⁰⁵ The ICJ has also rejected the availability of punitive or exemplary damages, even in those cases involving the most serious violations of international human rights and humanitarian law.Footnote ¹⁰⁶

On the other hand, it has been suggested that equitable considerations may warrant an adjustment (or proportionate reduction) of compensation in order to accommodate additional, countervailing considerations, that relate either to the injured party or the wrongdoer State. As regards to the first category, some tribunals have sought to limit the amount of recoverable compensation by reference to the injured party’s conduct that either precedes or follows the wrongful act. For example, in Himpurna v PLN the Tribunal applied the doctrine of abuse of right in favour of the respondent, in order to prevent the claimant’s contractual rights from being extended ‘beyond tolerable norms’, also taking into account PLN’s status ‘as an arm of governmental policy acting in pursuit of the public welfare’. On that basis, it lowered the amount of compensation due referring to ‘equitable principles’.Footnote ¹⁰⁷

Conversely, international tribunals have endorsed the proposition that the amount of compensation must be reduced when the claimant has failed to take ‘reasonable steps’ to mitigate the injury caused.Footnote ¹⁰⁸ Failure to mitigate damages has been understood as a matter that is notionally distinct from the contributory fault/negligence of the injured party in the occurrence of the wrongful conduct and the emergence of the harm, which is a matter related to the existence of causal nexus.Footnote ¹⁰⁹ Insofar as tribunals have based the existence of a ‘duty to mitigate damages’ upon considerations of fairness,Footnote ¹¹⁰ this proposition may be interpreted as a specific form of equitable considerations that comes into play after the occurrence of the harm. In the same vein, the Arbitral Tribunal in the Loan Agreement case emphasised the ‘equitable character’ of the customary norms of compensation, which led the Tribunal to consider not only the ‘technical’ provisions of the treaty and loan agreements, but also the ‘overall circumstances of the case, including the causes of delay, the misunderstandings (…) and generally the specific situation and conduct of both Parties, as well as the totality of the relations of amity and co-operation.’Footnote ¹¹¹

With respect to equitable considerations relating to the wrongdoer State, it is important to note that recent scholars have argued for the reconceptualisation of investment arbitration from a private-law-type arbitration into a form of ‘public-law adjudication’, which takes into consideration the public functions of the host State vis-à-vis its population in furtherance of the public interest and allows for some flexibility to the host State concerned. The public-law paradigm has found expression in investment arbitration in several ways, such as the principle of proportionality, legitimate expectations and the applicable standard of review.Footnote ¹¹² Similar considerations have found their way into the assessment of damages.Footnote ¹¹³ For instance, it has been suggested that investment tribunals should either weigh the level of compensation against legitimate ‘public interest’ considerations motivating the unlawful conduct of the host StateFootnote ¹¹⁴ or consider the circumstances surrounding the wrongful act, such as the occurrence of an armed conflict in the host State’s territory.Footnote ¹¹⁵

Within that context, the potentially ‘crippling’ effect that large sums of compensation may have for a host State’s financial subsistence has been suggested as a potential equitable consideration that is relevant to quantum. In his separate opinion in the quantum phase of CME v Czech Republic, Sir Ian opined that the principles of compensation must be read within the framework of the BIT and noted that ‘[i]t would be strange indeed, if the outcome of a [BIT] took the form of liabilities “likely to entail catastrophic repercussions for the livelihood and economic well-being of the population”’.Footnote ¹¹⁶ Along similar lines, Paparinskis has argued in favour of an exception to the principle of full compensation, with a view to ensuring that ‘[r]emedies serve social as well as individual needs’: to the extent that the bilateralist precepts of corrective justice that underlain Chorzów Factory have gradually evolved in a more communitarian direction, Paparinskis posits that the standard of compensation ‘can be changed in line with the broader structural shifts in modern international law’.Footnote ¹¹⁷ Indeed, in the Armed Activities case the ICJ took note of Uganda’s plea that a large amount of compensation would exceed its capacity to pay and seems implicitly to have endorsed the relevance of this legal ground by reference to the award by the Eritrea-Ethiopia Claims Commission (EECC).Footnote ¹¹⁸ Ultimately, however, the Court was ‘satisfied that the total sum awarded (…) remain[ed] within the capacity of Uganda to pay’, although it ordered the payment of the sum in annual instalments, presumably in order to Uganda’s ability to meet its people’s basic needs.Footnote ¹¹⁹

The foregoing remarks serve to show that equitable considerations are not a monolithic concept but are used as an umbrella term to denote a wide variety of factors and circumstances which have an influence upon quantum. To be sure, a detailed analysis of each these considerations would exceed the limited purpose of this chapter, but a key point stands out: whatever these ‘equitable considerations’ may be, it is suggested that investment tribunals do not have a carte blanche to subvert the customary principle of full reparation on the basis of ‘abstract equity’.Footnote ¹²⁰ Indeed, it is well settled that an investment tribunal ‘must base its decision on objective and rational considerations which must be stated.’Footnote ¹²¹ The US’ strong objections to the application of equitable considerations in the determination of compensation arising from the Norwegian Shipowners case aptly illustrates how an unprincipled application of equity to damages may have serious repercussions on the validity of the arbitral award and the integrity of the process.Footnote ¹²² As Judge Yusuf stated in the Armed Activities case,

On that basis, it is submitted that, whilst infra legem equity may have a bearing on the interpretation of customary norms governing compensation, it is by its nature subject to certain limitations that may either be intrinsic to the ‘general framework of State responsibility’ or extrinsic to it, appertaining to the ‘procedural framework governing the fact-finding procedure’ before the respective court or tribunal. We shall examine these two kinds of limitations in turn.

5 Conclusion

In 1939, Winston Churchill described Russia’s foreign policy during World War II as ‘a riddle wrapped in a mystery inside an enigma’.Footnote ¹⁸⁹ There might be no better phrase to describe the use of equitable considerations by investment arbitral tribunals in the process of determining damages for violations of international law. This chapter may have been unable fully to unravel that mystery, but some useful lessons can be drawn. By now, the Chorzów Factory standard has been widely recognised as reflecting the customary standard governing reparation, but customary rules do not operate in a legal vacuum. International courts and tribunals have progressively acknowledged the general principle of equity as normative proposition capable of affecting the interpretation of customary norms, including secondary rules governing State responsibility. Even though the ILC avoided to articulate an express rule to that effect, it was well understood that equitable considerations had a role in the determination of compensation either as ‘aggravating’ or ‘mitigating’ circumstances.

Yet, infra legem equity is not unbound: it is subject to certain limitations that may either be intrinsic to its nature as an interpretative canon, or stemming from the procedural framework governing the function of the tribunal. Within these parameters, equity is not a magic spell that elides rational conceptualisation; to hold otherwise could have serious implications to the interpretative process and undermine the integrity of the procedure itself. And while it may be true that the assessment of damages is not always a precise science,Footnote ¹⁹⁰ the opposite also holds true: ‘[e]quitable principles should not be used to make good the shortcomings in a claimant’s case by being substituted for evidence which could have been produced if it actually existed: equity is not alchemy.’Footnote ¹⁹¹

1 Introduction

There are several provisions in the Vienna Convention of the Law of Treaties (VCLT), reflecting customary law. Already in 1969, the VCLT was considered to be a partial codification of customary international law (CIL). Other rules of the VCLT constituted then developed into customary law.Footnote ¹ Indeed, according to the commentaries to the VCLT the large majority of its provisions currently reflects custom.Footnote ² As international investment law is a branch of international law based primarily on treatiesFootnote ³ it is not surprising that the provisions of the VCLT and corresponding customary rules have been often interpreted and applied by investment tribunals. Considering that the total number of investor-State dispute settlement (ISDS) cases had reached 1,190 by the end of 2021,Footnote ⁴ investment arbitrationFootnote ⁵ has the potential to significantly influence the interpretation of the law of treaties, both in the rules contained in the VCLT as well as those confirmed by CIL.

The situation of parallel existence between treaty and customary rules demonstrates that it is not only a treaty’s rules, but also the customary ones, that in practice can be, and in fact are, interpreted.Footnote ⁶ Furthermore, this scenario in particular proves that the content determination of customary rules can be, and is, accomplished through a different approach than the ascertainment of two classical elements of custom, that is, State practice and opinio juris.Footnote ⁷

This chapter will focus on two issues discussed broadly by investment tribunals: rules on conflicts of treaty norms (Article 30 of the VCLT and corresponding CIL) and rules relating to subsequent agreements in relation to the interpretation of treaties (Article 31(3)(a) of the VCLT and corresponding CIL). Emphasis on these two examples of the interpretation of customary law in investment arbitration seems to be particularly pertinent as, in these two areas, tribunal’s decisions seem to diverge from the approach, as reflected in the works of the International Law Commission (ILC), traditionally taken in general international law. Why do investment tribunals deviate from agreed understanding of rules on conflicts of norms? How they define the scope of these rules? And with respect to subsequent agreements, can they influence the CIL concerning the interpretation of treaties which envisage rights for individuals? These issues certainly call for a study on the matter.

The aim of this chapter is not to provide an extensive and exhaustive list of all such cases where the interpretation of the customary rules codified in Articles 30 and 31(3)(a) of the VCLT has occurred but rather to highlight some most interesting examples which demonstrate the general approach of investment tribunals to these norms.

2 Interpreting Rules on Conflicts of Treaty Norms in Investment Arbitration

The issue of resolving conflicts of norms originating from different legal acts is central to every legal order.Footnote ⁸ In international law it is regulated in Article 30 of the VCLT and corresponding CIL. From the perspective of international investment law, the main issue that has arisen in the interpretation of this legal norm relates to the material scope of the entirety of Article 30, ie the reference in the title and paragraph 1 of this provision to treaties ‘relating to the same subject matter’.Footnote ⁹

The jurisprudence of investment arbitral tribunals has mainly referred to Article 30 VCLT in cases concerning the relationship between intra-EU investment treaties, or the intra-EU application of the Energy Charter TreatyFootnote ¹⁰ in relation to the Treaty on the Functioning of the European UnionFootnote ¹¹ (TFEU, or its predecessor – the Treaty Establishing the European CommunityFootnote ¹²). In the former case, Article 30 of the VCLT was invoked by the respondent, most often a Central-Eastern European State, as an argument emphasising the priority of the EU Treaties – subsequent treaties, over investment treaties – earlier treaties, ie dating back to the 1990s. At times, arbitral tribunals have also commented on the concept of the ‘same subject matter’ against the background of the applicability of Article 59 VCLT, which is also considered to reflect a customary rule, and then referred their conclusions to the applicability of Article 30 of the VCLT, even if they noticed differences between the purposes of these provisions.Footnote ¹³

As the ILC indicated in its report on fragmentation, adopting a narrow interpretation of this formulation could result in a number of potential treaty conflicts not being covered at all by this provision.Footnote ¹⁴ The Commission emphasised that:

The ILC, therefore, opted for a flexible approach to the formulation of ‘same subject matter’. Support for this position can be found in the Commission’s commentary to the 1966 Draft Articles on the Law of Treaties,Footnote ¹⁶ where the view was expressed that this formulation was intended to broadly cover cases of incompatibility between treaty norms. This issue has rarely been a subject of consideration by international courts and tribunals. Similar reasoning to the position of the ILC can be found in GATT/WTO decisions. In EC – Imposition of Anti-Dumping Duties on Imports of Cotton Yarn from Brazil the panel stated that on the basis of analysis of a single of provision of the Multifibre Arrangement (MFA), the Anti-Dumping Agreement and the MFA were treaties ‘relating to the same subject-matter’.Footnote ¹⁷ In the China – Measures Related to the Exportation of Rare Earths, Tungsten, and Molybdenum the Appellate Body acknowledged that all multilateral trade agreements annexed to the Marrakesh Agreement relate to the same subject matter without detailed examination.Footnote ¹⁸

Arbitration decisions, however, have adopted a narrower understanding of Article 30 VCLT and, consequently, of the customary norm that this provision codifies. As was stated by the Eastern Sugar Tribunal, ‘[w]hile it is true that European Union law deals with intra-EU cross border investment, say between the Netherlands and the Czech Republic, as does the BIT, the two regulations do not cover the same precise subject-matter’.Footnote ¹⁹ The Tribunal underlined inter alia the existence of fair and equitable standard,Footnote ²⁰ as well as the possibility for an investor to sue the host-State directly, as grounds to reject the ‘equivalence argument’.Footnote ²¹ This approach has been upheld in many subsequent arbitration awards relating to intra-EU bilateral investment treaties (BITs).Footnote ²² In EURAM, the Tribunal rejected the interpretation that the ‘same subject matter’ can be equated to being applicable to ‘the same facts’, or having ‘the same goal’.Footnote ²³ The decision then subsequently elaborated that ‘[t]he subject matter of a treaty, in the Tribunal’s understanding, therefore differs both from the concrete situations in which it will be applicable and from its goal’.Footnote ²⁴ For this Tribunal, the crucial argument was that prior to the Lisbon Treaty the EU had no competence in relation to direct investment.Footnote ²⁵ A narrow interpretation was also presented by the Strabag Tribunal which ‘under[stood] the precondition of “same subject matter” as requiring the subject matters of the two treaties in question to be “identical”’.Footnote ²⁶ Again, a similar position was expressed by the Juvel Tribunal: ‘[t]wo different treaties may apply simultaneously to the same set of facts without them having the same subject-matter. Further, if two treaties have the same goal but approach the achievement of that goal from two different perspectives, the treaties do not have the same subject-matter’.Footnote ²⁷ The negative position of these tribunals, towards the applicability of the conflict of norms provisions, was primarily related to the far-reaching consequences that States could derive from the arguments in this regard, ie lack of jurisdiction of those tribunals to examine the case.Footnote ²⁸

It is significant that in most of the aforementioned decisions, the arbitral tribunals did de facto interpret CIL, as the VCLT was inapplicable. In the overwhelming majority of these cases, tribunals seemed to be unaware of this legal situation, as evidenced by the awards, which clearly indicate that they were applying the VCLT. This issue typically did not explicitly appear in the proceedings, as usually both the respondents and claimants seemed to also presume that the VCLT did apply after all.Footnote ²⁹ This was the case in disputes against Slovakia or the Czech Republic brought on the basis of 1990 BIT with the UKFootnote ³⁰ (A11Y, Anglia, Busta), the 1990 BIT with GermanyFootnote ³¹ (Binder, JSW Solar), or the 1992 BIT with the NetherlandsFootnote ³² (Eastern Sugar, Oostergetel, Achmea), as the Czech and Slovak Republics were only bound by the VCLT in 1993. The same issue related to the disputes against Poland (which acceded to the VCLT in 1990) on the basis of the 1988 BIT with AustriaFootnote ³³ (Strabag) and 1987 BIT with Belgium and LuxembourgFootnote ³⁴ (GPFFootnote ³⁵).

Conversely, the only cognizant approach in this respect in the cases involving intra-EU BITs was applied by the tribunal in EURAM on the basis of the 1990 Czechoslovakia-Austria BIT.Footnote ³⁶ Considering the argument of Slovakia that the VCLT was not applicable and that only the corresponding CIL, with respect to Articles 30 and 59 VCLT (but not Article 65), being applicable, the Tribunal referred to the exchange of diplomatic notes between the States concerned confirming the succession of the BIT in 1994. This assertion allowed it to recognise that the BIT was concluded in 1994.Footnote ³⁷ It is to be noted that the approach formulated by the tribunals on the same subject matter issue, where they decide incognizantly on the basis of CIL (such as Eastern Sugar, Oostergetel, Binder, or Achmea (I)), has been recognised and followed by arbitral tribunals directly adjudicating under the VCLT.Footnote ³⁸

When reaching the conclusion that the conflict of norms provisions do not apply as prerequisite of ‘the same subject matter’ is not fulfilled – arbitral tribunals most often did not offer any suggestions on how to solve the problem of a conflict of such norms. Initially, this approach was a consequence of not perceiving existence of such a conflict at all. Tribunals have also continued to maintain such a position after the judgment of the Court of Justice of the European Union (CJEU) in the Achmea case, despite the fact that the CJEU unequivocally confirmed the existence of such a conflict.Footnote ³⁹ Regardless, it is noticeable that since this judgment, arguments concerning the different material scope of the treaties has been increasingly and more clearly evoked by tribunals.Footnote ⁴⁰ Significantly, arbitral tribunals have pointed to the lack of ISDS in the EU Treaties as the main argument for the difference, while the CJEU explicitly stated that ISDS is contrary to the EU Treaties. A culmination of this legal reasoning was the 2019 ruling in Magyar Farming Company v Hungary in which the Tribunal, while noting that Article 30 VCLT was inapplicable due to the treaties’ differing subject matter,Footnote ⁴¹ determined:

In conclusion, the case law of arbitral tribunals makes it necessary to analyse Article 30 VCLT’s ‘same subject matter’ formulae in more detail. As it turns out, an element of this provision, overlooked even in the commentaries to the Convention,Footnote ⁴³ may be a key argument for rejecting application of this rule. This position, if comprehensively applied, could prevent any practical application of Article 30 VCLT and its corresponding CIL. Thus, from a systemic perspective, this line of interpretation should not be upheld,Footnote ⁴⁴ as it is difficult to assert that this potential interpretation of CIL presented by the arbitral tribunal would be followed by States or other international court and tribunals. The fact that approach of investment arbitration was clearly linked with the defense of its own jurisdiction by the tribunals has created circular or, perhaps, opportunistic lines of argumentation. This position, however, has been poorly embedded in general international law, which leads to a conclusion that its significance outside the framework of international investment law is limited. An alternative position would be recognising that this line of interpretation has led to significant gaps in conflict of rules under general international law.Footnote ⁴⁵

3 Subsequent Agreements in Relation to the Interpretation of Treaties

The second point under scrutiny concerns the subsequent agreements in relation to the interpretation of treaties regulated by Articles 31 (3)(a) VCLT. This issue was recently elaborated by the ILC in its 2018 Draft Conclusions on Subsequent Agreements and Subsequent Practice in Relation to the Interpretation of Treaties.Footnote ⁴⁶ Articles 31(3)(a) VCLT provide:

As has been stated by the ILC,Footnote ⁴⁸ and previously by international courts,Footnote ⁴⁹ tribunals,Footnote ⁵⁰ and investment tribunals,Footnote ⁵¹ the abovementioned rules also apply under customary law. Thus, these norms regarding interpretation could also be the object of interpretation as customary rules.Footnote ⁵² Such an approach has been applied by the WTO, where Article 31(3)(c) VCLT was considered to be custom in the Measures Affecting the Production and Sale of Clove Cigarettes case.Footnote ⁵³ Concerning the most-favoured nation (MFN) clause, the whole of Article 31 VLCT as a customary rule has also been scrutinised in investment arbitration jurisprudence.Footnote ⁵⁴

Already in 1966, the ILC had confirmed that the joint intention of parties, which underpins the conclusion of a treaty, has a particular authority when identifying the meaning of that treaty, even after its conclusion.Footnote ⁵⁵ This was in line with the ICJ’s jurisprudence.Footnote ⁵⁶ Regarding the legal effects of subsequent agreements, it is worth noting, first of all, Conclusion 7(1) adopted by the ILC, which states that

In the commentary to this provision, the Commission recognised, inter alia, the possibility for the parties to depart, by a subsequent agreement, from the ordinary meaning of the words of a treaty and to give them special meaning within the context of Article 31(4) VCLT. A departure from the ordinary meaning of words may be particularly justified if it is considered that the parties, in concluding the treaty, intentionally wished to give them an evolving meaning or content, by using general expressions, to take account of developments in international law.Footnote ⁵⁸

The ILC’s interpretation of Article 31(3)(a)-(b) VCLT can be compared to the position of arbitral tribunals on declarations or joint interpretations formulated by the parties to the treaty. One of the most famous examples of a subsequent agreement in international investment law is the interpretative note by the North American Free Trade Agreement (NAFTA) Commission,Footnote ⁵⁹ which narrowed the scope of Article 1105 NAFTA. In particular, the arbitral tribunal in Pope & Talbot v Canada stated that ‘were the Tribunal required to make a determination whether the Commission’s action is an interpretation or an amendment, it would choose the latter’.Footnote ⁶⁰ However, the tribunal found that this issue was not relevant as, regardless of the legal qualification of the note, its previous decision was consistent with it.Footnote ⁶¹ In the Methanex case, by contrast, the arbitral tribunal cited Oppenheim’s position according to which authentic interpretation of the parties to the treaty ‘overrides the ordinary principles of interpretation’.Footnote ⁶²

Besides the NAFTA Tribunal’s approach, which was based on an explicit clause in NAFTA, the issue of joint interpretation as a subsequent agreement has featured significantly in disputes concerning intra-EU BITs and intra-EU applications of the ECT.Footnote ⁶³ What is striking in the practice of tribunals in intra-EU disputes is that the readiness to accept any significance of such an interpretation is very limited, which differs from the position of the NAFTA tribunals. In the fundamental Eskosol decision, the Tribunal evaluated whether the Declaration of the Governments of the Member States on the Legal Consequences of the Judgment of the Court of Justice in Achmea and on Investment Protection in the European Union of 22 EU-Member States (EU Declaration)Footnote ⁶⁴ was a subsequent agreement under Article 31(3)(a) VCLT.Footnote ⁶⁵

The Tribunal criticised the lack of detailed justification in the EU Declaration, although it did not explain its source for such a requirement.Footnote ⁶⁶ It referred to the ILC’s works, although, surprisingly, not to those related to subsequent agreements, but instead its work related to reservations.Footnote ⁶⁷ Consequently, the Tribunal decided that the EU Declaration cannot be considered as a subsequent agreement as it does not refer to any particular provision of the ECT.Footnote ⁶⁸ Following the judgment of Singapore Court of Appeal in the Sanum case,Footnote ⁶⁹ the Eskosol Tribunal cited an excerpt from the 1966 Commentary of the Draft Articles on the Law of Treaties to assert that subsequent agreements are only intended to clarify the findings of the treaty negotiations.Footnote ⁷⁰ This element requires closer inspection as it has been repeated on several occasions by arbitral tribunals interpreting Article 31(3)(a) VCLT.Footnote ⁷¹

As a matter of fact, a broader citation of the ILC’s commentary in this respect does not in any way prejudge the accuracy of this position but rather (contrary to the conclusions drawn by the arbitral tribunals) emphasises in particular the significant nature of the subsequent agreements.Footnote ⁷² Furthermore, it is worth noting another extract from this decision: ‘VCLT Article 31(3)(a) is not, however, a trump card to allow States to offer new interpretations of old treaty language, simply to override unpopular treaty interpretations based on the plain meaning of the terms actually used’.Footnote ⁷³ This interpretation was subsequently cited by arbitral tribunals as rationale of their position in this respect, even when evaluating different legal situations.Footnote ⁷⁴ Thus, in the view of the Tribunal in Eskosol, a subsequent agreement ‘may “corroborate” or “support an interpretation that has already been determined by other methods,” such as “the objective elements listed in articles 31 and 32 of the Vienna Convention,” but it cannot override the application of those elements’.Footnote ⁷⁵ Finally, when the rights of individuals are impacted purportedly on the basis of general principles of law or CIL, the Eskosol decision supports the need for limitations upon the interpretative influence of subsequent agreements.Footnote ⁷⁶ This position had already been presented by the Enron tribunal; according to which, no new interpretation of an International Investment Agreement (IIA) can ‘affect rights acquired under the Treaty by investors or other beneficiaries’.Footnote ⁷⁷

Following the Eskosol decision, this restrained approach to subsequent agreements concerning the EU question (or so-called intra-EU objection) has been presented by other tribunals. According to the Addiko Bank Tribunal, EU member States do not have the right to interpret the TFEU, as this competence has been entrusted exclusively to the Court of Justice of the EU.Footnote ⁷⁸ The Strabag Tribunal stated that ‘[f]rom the text of Article 31(3) VCLT, it is evident that such “extrinsic” elements, while informative to the context of a treaty, cannot be used to rewrite the ordinary meaning of the text of the treaty under interpretation’.Footnote ⁷⁹

In Muszynianka, subsequent agreements relating to interpretation, although recognised as CIL,Footnote ⁸⁰ were considered as ‘merely one element’ that ‘[is] not an exclusive and dispositive method of treaty interpretation’.Footnote ⁸¹ Thus, the influence of subsequent agreements upon interpretation could be ruled out when, in the opinion of tribunal, it explicitly flows from the ordinary meaning.Footnote ⁸² The Muszynianka decision is extraordinary in this context as it totally ignored the bilateral declaration of the BIT’s State Parties, which the Tribunal justified by the fact the declaration was linked to the EU Declaration. Analysis of the latter was sufficient according to the tribunal.Footnote ⁸³

With regard to the relationship between the rights of individuals and interpretation on the basis of Articles 31 (3)(a) VCLT, the Tribunal in Green Power noted that the competence of States in this respect can induce inequality between parties of an arbitral proceeding, as one of them could change – with retroactive effect – the text of the ECT. Nevertheless, in this monumental decision, the Tribunal acknowledged that no such situation arises with respect to the EU Declaration in the context of the relationship between ECT and the EU law.Footnote ⁸⁴ Thus, what was crucial for the Green Power Tribunal was the interpretations made by the respondent and the investor’s home-State, and not that this interpretation was not confirmed by all the parties of both applicable multilateral treaties.Footnote ⁸⁵ Furthermore, the Tribunal, on one hand, seemed to support the position that subsequent agreements could not be applied retroactively if they related to the rights of individuals, but, on the other hand, stated that ‘Spain’s offer to arbitrate under the ECT is not applicable in intra-EU relations’ without indicating any concrete moment in time when this offer’s non-applicability took effect.Footnote ⁸⁶

As in the case of Article 30 VCLT – investment arbitration, in several cases, has interpreted Articles 31 (3)(a) VCLT and its customary counterpart. At least in one case (Strabag), only CIL was the subject of interpretation, as the VCLT was not applicable in the case. In this context it is to be noted that investment arbitration informs possible interpretations of Articles 31 (3)(a) in at least two areas – retroactive application and, connected with it, the impact on the rights of individuals.Footnote ⁸⁷ Thus, although ‘the parties to a treaty own the treaty and can interpret it’,Footnote ⁸⁸ their freedom in respect to international investment law is met with significant scrutiny and reticence from the arbitral tribunals. In fact: ‘[t]he only situations in which tribunals have been bound to follow the interpretive directions of the state parties are where the relevant treaty goes beyond the general VCLT rules and specifically provides for joint interpretations to be binding’.Footnote ⁸⁹

Such an approach tends to look at IIAs not only as a transaction between the parties,Footnote ⁹⁰ which have full discretion as to how to apply the mutually agreed upon provisions, but as an agreement which relates also to other beneficiaries. As Anthea Roberts puts it:

The problem with this line of reasoning is twofold. First, under international law, the State parties have the principal competence in the interpretation of treaties. This is not in any way changed by the fact that the interpretation can have a positive influence on their position in a dispute. It is still ‘their’ treaty.Footnote ⁹² Second, certainly, there is an accepted domestic practice of retroactive change in the interpretation of statutesFootnote ⁹³ or retroactive application of new precedents. The latter point has been evaluated by domestic constitutional and international courts and was, in principle, not found as violating the rule of law.Footnote ⁹⁴ Thus, domestic law does not have to justify its departure from the VCLT or customary law rules on interpretation. The powers of State parties to interpret ‘their’ treaties is well-represented in the China–Australia Free Trade Agreement (ChAFTA)Footnote ⁹⁵ which allows parties, in certain situations, to agree on whether the case pending before arbitral tribunal can be adjudicated due to the treaty constraints in this respect.Footnote ⁹⁶ As a result, there is an evident tension between the right of State parties regarding treaty interpretation under general international law and the emerging tendency for this competence to be limited with respect to rights of investors.

4 Conclusions

The two mentioned rules, on the conflict of norms and the influence of subsequent agreements regarding the interpretation of treaties, exemplify that investment arbitration can not only impact the interpretation of general international law concerning the responsibility of States, but they also have the potential to influence the law of treaties.

With respect to the first issue, it is to be noted that there exists a coherent line of tribunals decisions concerning relations between international investment agreements and EU treaties, which narrowly interpret the issue of ‘the same subject matter’ for possible conflicting treaty norms. Such an approach is particularly remarkable as it differs from the position taken by the ILC both in its work on the law of the treaties as well as in its study on the fragmentation of international law. Such a position differs also from the interpretations contained in two GATT/WTO decisions. Nevertheless, as this issue has not generally been the subject of scrutiny in international courts and tribunals in inter-State cases, investment awards cannot be disregarded as they represent the most extensive jurisprudence in this area. Still, from a systemic perspective, investment tribunals’ line of argumentation leads clearly to fragmentation as they approach investment treaties as almost self-contained regimes, which are resilient to a conflict of rules analysis unless the two applicable treaties are almost identical. It is remarkable that even a year after publication of the ILCs report on fragmentation, whose main message was ‘that the emergence of special treaty-regimes (which should not be called “self-contained”) has not seriously undermined legal security, predictability or the equality of legal subjects’,Footnote ⁹⁷ investment tribunals, at least with respect to the application of conflict of norms rules, have initiated a process leading towards the opposite direction. In this respect, in my view, investment awards which interpret not only rules of the VCLT, but also their corresponding CIL rules, seem to have pro futuro limited value and should rather be considered to have incidental significance for general international law.Footnote ⁹⁸ It seems that this approach taken by investment tribunals has been largely dictated by the need to defend their jurisdiction. What is striking is the number of cases in which tribunals were convinced that they could apply the VCLT when, in fact, only CIL was applicable in the respective case. This approach can also prove that at least with respect to rules with double force (treaty – customary) under international law, the method of interpretation can be similar to a large extent.

Regarding the VCLT and CIL rules on subsequent agreements several observations can be made. First, the ease with which arbitral tribunals reject interpretations formulated by States through subsequent agreements is striking. The analysis of these agreements is often rudimentary, absent, or the tribunal simply refers to other rulings – indicating that it considers these interpretations as their own – without sometimes paying attention to the difference in legal situations between the cases whose jurisprudence it cites. Second, tribunals have set out detailed requirements for the formulation of a declaration, without explaining the source for these requirements. Third, there is a considerable difference between tribunals referring to joint interpretations of State Parties, as envisaged by the treaty as binding (such as with NAFTA), and the tribunal assessing such interpretations through the lens of the VCLT or corresponding customary rules. With respect to the latter, tribunals tend to diminish the role of subsequent agreements by underlining the ‘taken into account’ formulae of Article 31(3) VCLT. Due to the laconic nature of the provisions of most of the investment agreementsFootnote ⁹⁹ (in particular so called ‘old-generation’ treaties),Footnote ¹⁰⁰ this approach enables investment tribunals, through the interpretation of the ‘ordinary meaning’ of terms and the ‘object and purpose’ of a treaty, to maintain its far-reaching interpretative power.

What follows from these observations is, to my mind, the necessity of bringing consistency between the case law of international investment arbitration tribunals and general international law, both as regards conflict of norms as well as of the role subsequent agreement and subsequent practices. Thus, there is a continuous need for more grounding of investment jurisprudence in the realm of general international law.Footnote ¹⁰¹

Still, investment arbitration can inform general international law in at least in two areas, which were not explicitly articulated by the ILC in its 2018 Conclusions, the retroactive application of interpretations and, connected with it, the impact on the rights of individuals. Certainly, in this respect, investment arbitration leans towards interpretations which restrain the rights of State parties as the ‘masters’ of treaties.Footnote ¹⁰² However, the line between rights of State parties and rights of the individual beneficiaries of the treaties (ie investors) has not yet crystallised. Thus, this trend coming from investment arbitration should be juxtaposed with the approach of other international tribunals and domestic constitutional courts’ jurisprudence.