REUTERS | Gleb Garanich

The new frontier: investment treaty disputes in times of war and annexations

The recent events regarding the annexation of Crimea by Russia has given rise to the issue of a breach of territorial integrity and thus the sovereignty of states, and how such a breach affects the application of investment treaties and dispute settlement options.

My starting point is that the annexation of a part of a territory of one state by another state is clearly in violation of international law, which prohibits the acquisition of territory by force. At the same time, the affected state, which has lost the territory, its citizens and investors, need tools to deal with this situation, in particular when it comes to the compensation of damages.

Recently, several Ukrainian investors have succeeded in convincing arbitral tribunals to accept jurisdiction on the basis of the 1998 Ukraine-Russia bilateral investment treaty (BIT) regarding potential breaches of Ukrainian investments by Russia. However, the problem is that by using dispute settlement options based on international law, the annexation of Crimea by Russia could be legitimatised by relying on international law instruments.

In particular, this is the case with regard to BITs, which are based on the notion that the territories of each contracting party remain fixed as defined in the investment treaty. If an arbitral tribunal accepts its jurisdiction on the basis of the BIT, this could be interpreted as implicitly or even explicitly accepting that the annexed territory belongs, after the annexation, to the territory of the other contracting party. However, justice requires that illegal annexation and all violations of fundamental rights associated with it must be made good.

The only way to reconcile the non-recognition of the annexation and the use of dispute settlement instruments based on international law is that one must distinguish between the implicit or explicit acceptance or recognition of the illegal annexation and the use of dispute settlement tools available under international law. In other words, the use of dispute settlement tools available under investment treaties should not be seen as an implicit or explicit recognition of the annexation.

While the awards issued so far are not publicly available, the information that has been leaked suggests that the tribunals have been able to avoid making any determination as to the illegality of the annexation of Crimea. Instead, the focus has been on the aspect of de facto “control” over Crimea by Russia  since March 2014. Accordingly, the tribunal considers that Russia became responsible for Ukrainian investments in Crimea under the Ukraine-Russia BIT on 21 March 2014, the date on which President Vladimir Putin signed formal instruments bringing Crimea under Russian control. Apparently, Ukraine has made submissions as a non-disputing party, which are understood to have reassured the tribunal that it could find the BIT applicable without making a determination on the illegality of the annexation of Crimea.

However, it becomes clear that the application of the Ukraine-Russia BIT is based on legal constructions, which are stretched to a considerable extent. This does not provide a robust and convincing dispute resolution tool in situations such as the annexation of Crimea. This is so because BITs are, by their very nature, closely connected to the definition of the term “territory” of each contract party and once the territorial borders are moved by force, the application of the BITs becomes an artificial exercise. Consequently, we must overcome this nexus, if we want to find a robust and convincing dispute settlement tool. So, we must look beyond BITs. Indeed, I think it is necessary to create something new.

I would propose the creation of a new permanent international claims tribunal, which is, to a large extent, inspired by the US-Iran Claims Tribunal.

One may ask: is this the time for the creation of a new tribunal? We already have so many international courts and tribunals; do we really need another one?

Well, the fact is that, as we speak, the negotiations for creating a new permanent multilateral investment court (MIC) are underway within the United Nations Commission on International Trade Law (UNCITRAL). So, this provides us with an excellent opportunity to include specific provisions which would deal with claims concerning annexed or occupied territories. The advantage of including that in the creation of a new court is that the jurisdictional problems could be properly addressed. Indeed, looking at the Claims Settlement Declaration of 1981, which established the US-Iran Claims Tribunal, not much needs to be regulated. In fact, the proposed investment court system (ICS) which is included in the Canada-EU Comprehensive Economic Trade Agreement (CETA) and which provides the blue print for the MIC, already takes care of many relevant aspects.

The following issues are regulated in the Claims Settlement Declaration of 1981:

Article I prescribes a cooling off period of six months for settling a claim. Cooling off periods are usually included in BITs, including CETA. So, this issue poses no problem.

Article II simply states that an international arbitral tribunal is hereby established for the specific claims by nationals of both sides regarding the acts that took place in Iran. In our example, the MIC would be created by the treaty establishing it, so we only would need explicitly to expand the jurisdiction to cases involving claims in cases of territorial changes.

Article III prescribes the number of members of the tribunal and the appointment procedure. Coincidentally, that procedure is very similar to the one envisaged in the investment court for CETA and which will probably also be applicable to the MIC. That procedure allows each party to select one third of the members, while the remaining third shall be selected by mutual agreement.  In CETA, Canada would select one third of the Canadian members, the EU would select one third of European members and they both would select the remaining third from third states. For the US-Iran Claims Tribunal, the UNCITRAL Arbitration rules apply. They could apply to the MIC too without difficulty.

Article IV states that all decisions and awards are final and binding, and shall be enforceable in the court of any nation in accordance with its laws. That is similar to the proposed investment court, except that it also envisages an appellate tribunal. But I do not want to delve into the discussion regarding the pros and cons of an appellate tribunal for investment arbitration disputes. Suffice it to say, the idea is that at the end of the process, the MIC decisions are final and binding.

Article V prescribes that the tribunal shall decide all cases on the basis of respect for the law, applying such choice of law rules and principles of commercial and international law as the tribunal determines to be applicable. In principle, a similar wording could be used for the MIC.

Article VI determines The Hague as the seat of the tribunal. I see no reason why that should not be the case for the MIC as well.

Article VII defines “nationals” of Iran or the US, which includes natural and legal persons. It also defines “claims of nationals” as claims owned continuously from the date on which the claim arose to the date on which this agreement enters into force by nationals of that state, including claims that are owned directly by such nationals through ownership of capital stock, other proprietary interests in juridical persons, and so on. This is very similar to the definition of investors in most BITs and will eventually also be used for the MIC. This article also includes a fork-in the-road provision; it excludes the jurisdiction for such claims of the courts in Iran, the US or any other court. Again, it is very likely that the MIC would also include a fork-in the-road provision.

So in short, apart from the appeals tribunal, most features which we find in the US-Iran Claims Tribunal can also be found in the proposed investment court for CETA and will most likely be found in the envisaged MIC.

By all accounts, the US-Iran Claims Tribunal has functioned pretty well; it could therefore rightly serve as an appropriate model for such a claims chamber to be included in the MIC. In this way, international investment law can get out of current limitations by addressing the new frontier of territorial changes, which are the result of annexation, occupation, civil war or other use of force.

Despite the successful passing of the jurisdictional phase in several Ukrainian arbitration cases against Russia, the current system of BITs seems ill-equipped to provide clear and easily available dispute settlement options for those who have suffered from forced territorial changes. These kinds of territorial changes are taking place more often and more rapidly – for example, Catalonia or Scotland after Brexit. International treaties, such as BITs, simply cannot be modified quickly enough in order to accommodate these new realities. In my view, we must therefore look for new solutions.

Only the creation of a new body with a solid and clear-cut jurisdiction, which explicitly extends to cases of territorial changes, could provide a viable dispute settlement option.

Obviously, my proposal needs more reflection, discussion and further refinement, but nonetheless, I believe it is an option that should be explored further, and if possible, be integrated in the work in progress for the MIC.

EFILA Nikos Lavranos

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