The Quest for Protecting Investments under Occupation: The Inception of the Notion of De Facto Host-State in Investment Treaty Arbitration

Almost six years have passed since Russia’s annexation of Crimea and the city of Sevastopol on 18 March 2014 following a referendum according to which the regional authorities declared their independence from Ukraine and proclaimed their incorporation into the Russian territory. As of the moment of writing this blog, there are eight pending arbitrations that investors have commenced against Russia for its actions in the Crimean Peninsula under the Ukraine-Russia BIT.¹ Due to the confidential nature of the proceedings, the respective pleadings and awards in the Russian arbitrations are not available in the public domain. The media, however, reported that some of these tribunals have unanimously asserted their jurisdiction based on the ‘effectiveness’ of Russia’s control over Crimea.²

The tribunals’ use of the test of effective control in asserting their jurisdiction in the Russian arbitrations signifies the inception of what could be coined as the notion of a de facto host-state whose conceptualization under the current investment treaty regime is the primary purpose of this blog.

The protection of investments in occupied territories could give rise to various jurisdictional objections in investment treaty arbitrations. The characterization of such objections depends on the dimension from which one chooses to view the key issue at stake. If one considers the question to be whether the investment treaties of occupying states (ie the Russian treaties) apply to investments under occupation (ie investments in Crimea), the objection would be characterized as one pertaining to the tribunal’s ratione loci jurisdiction. The objection could also be one of ratione personae jurisdictionif the issue is whether an occupying state falls within the meaning of a host-state. However, considering that investment treaties give little, if any, guidance on their personal or territorial application,³ the present analysis deals with the issue as one pertaining to the territorial nexus between occupying states and investments under occupation, which triggers an objection to the ratione materiae jurisdiction of investment treaty tribunals.⁴

Many investment treaties on their definition of investment contain a requirement that the investment has to be made ‘in the territory’ of a contracting party (ie the host-state), which is commonly referred to as ‘the territoriality requirement of the investment’. Article 1(1) of the Russia-Ukraine BIT, for instance, defines ‘investments’ as ‘all kinds of property and intellectual values, which are put in by the investors of one Contracting Party on the territory of the other Contracting Party […].’ Even in the absence of an express territoriality requirement, such condition could be inferred from the concept of ‘investment’ itself as well as the nature of investment treaty obligations.⁵

In ordinary circumstances, the territoriality requirement denotes the existence of some degree of economic/financial connection between the host-State and the investment (ie the economic/financial aspect of the territoriality requirement).⁶ While such link could be easily established in respect of investments made in the de jure territory of a host-state, the fact that the situs of the investment is merely subject to the de facto control of a state party and does not form part of its sovereign territory calls into question the meaning of the term ‘territory’, which often appears in the formulation of the territoriality requirement in investment treaties. Leaving aside the distinctive wording of individual treaties, there are two approaches to interpreting this term. Scholars who followed the textual interpretive approach consider that treaties containing the phrase ‘in accordance or conformity with international law’ (which appears in the definition of ‘territory’ in several investment treaties including Article 1(4) of the Russia-Ukraine BIT) should be limited to the de jure (or sovereign) territories of the contracting parties.⁷ The drawback of this approach is that it overlooks the legally charged nature of the notions of territory and sovereignty as well as the interpretive significance of the treaty’s internal and external contexts as per Articles 31 and 32 of the Vienna Convention on the Law of Treaties (VCLT).⁸

To overcome the shortcomings of the textual interpretive approach, the forthcoming analysis proposes a contextual interpretation of the term ‘territory’ that takes into account the internal and external contexts of investment treaties for the purpose of determining whether it is confined to sovereign territories or could also encompass territories over which a state party exercises de facto control. Representing one of the main elements of their internal context,⁹ the object and purpose of investment treaties, which focuses on the protection of investments¹⁰, prima facie indicate that an investment is not required to be in the sovereign territory of a state party in order to be protected under the treaty.

As regards the external context, Article 31(3)(c) of the VCLT directs treaty interpreters to consider the relevant rules of international law when interpreting the term territory.¹¹ Two provisions may be relevant in this regard. The first is Article 29 of the VCLT that sets out the general rule on the territorial application of treaties and the second is Article 15 of the 1978 Vienna Convention on State Succession in Respect of Treaties (hereafter referred to as ‘the VCST’) that lays down the moving frontier rule. While the relevance of the first is unquestionable, the VCST does not qualify as a relevant legal source for the interpretation of the term ‘territory’ since, as established in its Article 6, it only covers the effects of a state succession that takes place in conformity with international law, thus excludes cases of annexation or occupation.¹²

The present analysis is, therefore, limited to Article 29 of the VCLT which reads: ‘Unless a different intention appears from the treaty or is otherwise established, a treaty is binding upon each party in respect of its entire territory.’ This provision establishes a presumption according to which investment treaties should be considered binding only in respect of the sovereign territories (ie de jure territories) of the contracting parties.¹³ This being said, the VCLT’s travaux préparatoires demonstrate that such presumption can be rebutted by way of interpretation where it appears from the object and purpose of the treaty and the nature of the obligations it contains that the contracting parties have intended for their investment treaties to reach beyond their de jure territories.¹⁴ The extraterritorial application of human rights treaties is a famous example of the reliance on the object and purpose, and subject-matter of treaties as grounds for their extension beyond the sovereign territories of the contracting parties.¹⁵

As previously demonstrated, the primary object and purpose of investment treaties is the protection of investments from the sovereign risks they assume when investing outside their home-states.¹⁶ As such, extending the scope of these treaties beyond the de jure territories of the contracting parties does not contradict their object and purpose. On the contrary, the application of investment treaties to territories over which a contracting party exercises effective control, albeit de facto, reinforces the protection of investments.¹⁷ Such expansive construction could make more sense when one considers that investments in territories over which a state party exercises effective control assume the same sovereign risks as investments in the de jure territory of a state party. For instance, like investments in de jure territories, investments under occupation bear the risk of having their assets requisitioned, expropriated, destroyed or being treated in an arbitrary, unreasonable, unfair, or inequitable manner by the authorities of the occupying state. There are several instances where occupants have seized the assets of investments in occupied territories. Following the 1967 war, Israel confiscated several oil fields that Egypt had granted to foreign companies through concession contracts in the Sinai Peninsula.¹⁸ Likewise, since its annexation to Crimea, Russia seized assets worth more than one billion dollars.¹⁹

Having established that the object and purpose of investment treaties militates towards their extension to investments over which a state party exercises effective control, the next step is to identify the threshold of the ‘effectiveness’ of such control. To answer this question, one should refer to the subject-matter of investment treaties.²⁰ A typical investment treaty comprises of protection standards whereby one state party undertakes to protect the investments of another state party from the potential abuse of power by its legislative and enforcement authorities. The expropriation standard, for instance, sets out the conditions for a lawful taking of property by the legislative and enforcement authorities of a state party. Likewise, the full protection and security standard, which requires host-states to refrain from infringing upon investments and protect them from third-party encroachments, presupposes that a state party is capable of asserting its legislative and judicial powers on the situs of such investments. Additionally, the obligation to treat investments in a fair and equitable manner assumes that the contracting parties exercise actual legislative, administrative, or judicial powers over the assets comprising an investment.²¹

It appears from the subject-matter of investment treaties that the exercise by a state party of legislative and enforcement jurisdiction, albeit de facto, over the situs of the investment should trigger its treaty obligations. Using the test of legislative and enforcement jurisdiction as a determinant of whether the investment treaties of a state party could apply beyond its sovereign territories not only conforms with their object and purpose, and subject matter, but it also ensures the existence of the economic/financial link between the respective investment and the host-state which, as previously discussed, must be satisfied for the purposes of establishing the tribunal’s ratione materiae jurisdiction.

Insofar as the defendant state is concerned, a state party that satisfies the test of legislative and enforcement jurisdiction could be referred to as a de facto host-state. The notion of de facto host-state in this sense covers occupying states that exercise de facto legislative and enforcement powers over occupied territories. In the Crimean scenario, the Russian law formally annexing Crimea and the series of laws and regulations replacing the legal regime that used to govern the economic life and business activities in Crimea prior to the annexation show that Russia has met the definition of de facto host-state for the purpose of the application of its investment treaties to investments in Crimea.²²

A contrario, had Russia only had a military presence in Crimea (ie the situs of the investment), it would not have met the definition of a de facto host-state and its investment treaties would not have extended to investments in Crimea. The latter could still, however, seek remedies for their property losses against Russia before the European Court of Human Rights by invoking the protections of the European Convention of Human Rights, particularly Article 1 of the First Protocol to the Convention, which protects individual property. The expansive scope of investment treaties compared to human rights treaties could be explained by the erga omnes nature of the obligations of the latter which, unlike investment treaty obligations that require a more demanding test of effective control, allows for their extension to territories where the contracting states have a military (physical) presence.²³

In conclusion, while investment treaties, as a general rule, apply to sovereign territories, neither their object and purpose nor their subject matter inhibits their extension to territories over which a state party has legislative and enforcement power. The expansion of the territorial reach of investment treaties is even more logical in cases where the annexing/occupying state is the only authority that exercises legislative and enforcement jurisdiction in the situs of the investment, in which case it would be unrealistic to demand investors to establish an attributional link between the measure complained of and the sovereign host-state.²⁴ Inspired by the tribunals’ reliance on the effectiveness of Russia’s control over Crimea in the Russian arbitration, this blog suggests that the attributional problem that might arise in cases where a state other than the sovereign state has effective control over the situs of the investment could be resolved by the inception of the notion of de facto host-state, which signifies a state party to an investment treaty that exercises legislative and enforcement jurisdiction over the situs of the investment. Finally, it should be underscored that the application of the investment treaties of de facto host-states to investments in occupied/annexed territories should not deprive those investments of their protections under the investment treaties of de jure host-states, which shall remain applicable so long as the latter maintain their claim of the title of the occupied/annexed territory.²⁵

References

Alia Algazzar Member since February 20, 2020

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Alia Algazzar is an Associate Professor of International Law at the School of Law of the Arab Academy, an academic institution established under the auspices of the Arab League. She holds a Ph.D. Degree in International Law from the Graduate Institute for International and Development Studies (IHEID) and an earlier Master Degree in International Dispute Settlement from the Geneva Master in International Dispute Settlement (MIDS) in Switzerland. As a qualified Egyptian lawyer and a specialist in the fields of investment law and arbitration, Alia combines the best of both worlds. Beside her strong academic background, she trained in top-tier international arbitration boutiques, such as Shearman & Sterling and Cleary Gottlieb Steen & Hamilton in Paris and Freshfields Bruckhaus Deringer in Dubai, where she handled investor-state, interstate and commercial disputes involving parties from the Middle East. Based on her academic and practical experience, she currently works as an independent legal consultant in international economic law and dispute settlement.

Contributor

1. Oschadbank v The Russian Federation (Oschadbank v Russia); PJSC CB PrivatBank and Finance Company Finilon LLC v The Russian Federation (PCA Case No. 2015-21); Aeroport Belbek LLC and Mr. Igor Valerievich Kolomoisky v The Russian Federation (PCA Case No. 2015-07); (i) Stabil LLC, (ii) Rubenor LLC, (iii) Rustel LLC, (iv) Novel-Estate LLC, (v) PII Kirovograd-Nafta LLC, (vi) Crimea-Petrol LLC, (vii) Pirsan LLC, (viii) Trade-Trust LLC, (ix) Elefteria LLC, (x) VKF Satek LLC, (xi) Stemv Group LLC v The Russian Federation (PCA Case No. 2015-35); PJSC Ukrnafta v The Russian Federation (PCA Case No. 2015-34); Everest Estate LLC et al. v The Russian Federation (PCA Case No. 2015-36); (1) Limited Liability Company Lugzor, (2) Limited Liability Company Libset, (3) Limited Liability Company Ukrinterinvest, (4) Public Joint Stock Company DniproAzot, (5) Limited Liability Company Aberon Ltd v The Russian Federation (PCA Case No. 2015-29); NJSC Naftogaz of Ukraine, PJSC State Joint Stock Company Chornomornaftogaz, PJSC Ukrgasvydobuvannya and others v The Russian Federation (PCA Case No. 2017-16).
2. L. Rees-Evans, ‘Litigating the Use of Force: Reflections on the Interaction between Investor-State Dispute Settlement and Other Forms of International Dispute Settlement in the Context of the Conflict in Ukraine’ in K. Fach Gómez et al. (eds.) International Investment Law and the Law of Armed Conflict (European Yearbook of International Economic Law, Springer 2019) 186.
3. C Schreuer et al. (eds.), The ICSID Convention: A Commentary (2nd edn, CUP 2009) (hereinafter referred to as ‘Schreuer, ICSID Convention Commentary’) 1276, [1]-[3]; O Repousis, ‘Why Russian Investment Treaties Could Apply to Crimea and What Would This Mean for the Ongoing Russo-Ukrainian Territorial Conflict’ (2016) 32(3) J. Arb. Int’l 459-481 (hereinafter referred to as ‘Repousis, Why Russian Investment Treaties Could Apply to Crimea’) 462.
4. K Yannaca-Small & D Katisikis, ‘The Meaning of ‘Investment’ in Investment Treaty Arbitration’ in K Yannaca-Small (ed.) Arbitration under International Investment Agreements: A Guide to the Key Issues (OUP 2018) (hereinafter referred to as ‘Yannaca-Small & Katisikis, The Meaning of ‘Investment’ in Investment Treaty Arbitration’) 298.
5. Z Douglas, ‘Property, Investment and the Scope of Investment Protection Obligations’ in Z Douglas et al. (eds.) The Foundations of International Investment Law: Bringing Theory into Practice (OUP 2014) (hereinafter referred to as ‘Douglas, Property, Investment and the Scope of Investment Protection Obligations’) 373; Yannaca-Small & Katisikis, The Meaning of ‘Investment’ in Investment Treaty Arbitration 297; Abaclat and Others v. Argentine Republic (formerly Giovanna a Beccara and Others v. Argentine Republic) (ICSID Case No. ARB/07/5, Dissenting Opinion, 28 October 2011) [74].
6. J Salacuse, The Law of Investment Treaties (2nd edn, OUP 2015) 188; Yannaca-Small & Katisikis, The Meaning of ‘Investment’ in Investment Treaty Arbitration 298-301; Schreuer, ICSID Convention Commentary 192 et seq.; Douglas, Property, Investment and the Scope of Investment Protection Obligations 383–87. See also Ambiente Ufficio S.P.A. and others (formerly Giordano Alpi and Others) v. Argentine Republic (ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility, 8 February 2013) [498]-[500]; Fedax NV v Venezuela (ICSID Case No. ARB/96/3, Decision on Jurisdiction, 11 July 1997) [41]; SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (ICSID Case No. ARB/02/6, Decision on Jurisdiction, 29 January 2004) [101]-[2], [106]-[12]; Gavrilovic and Gavrilovic d.o.o. v. Republic of Croatia (ICSID Case No. ARB/12/39, Award, 26 July 2018) [204]-[5]; Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka (ICSID Case No. ARB/09/2, Award, 23 October 2012) [287]-[292].
7. D Costelloe, ‘Treaty Succession in Annexed Territory’ (2016) 65(2) ICLQ 343-378 (hereinafter referred to as ‘Costelloe, Treaty Succession in Annexed Territory’) 367-73.
8. Vienna Convention on the Law of Treaties 1969, 1155 UNTS 331.
9. Z Douglas, The International Law of Investment Claims (CUP 2009) (hereinafter referred to as ‘Douglas, The International Law of Investment Claims’) 82.
10. SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (ICSID Case No. ARB/02/6, Decision on Jurisdiction, 29 January 2004) [116]; Mera Investment Fund Limited v. Republic of Serbia (ICSID Case No. ARB/17/2, Decision on Jurisdiction, 30 November 2018) [125].
11. C Mclachlan et al. International Investment Arbitration; Substantive Principles (2nd edn, OUP 2017) 293, [7.95]; R Weeramantry, Treaty Interpretation in Investment Arbitration (OUP 2012) 1-9.
12. Article 6 of the VCST reads: “The present Convention applies only to the effects of a succession of States occurring in conformity with international law and, in particular, the principles of international law embodied in the Charter of the United Nations”. ILC, Documents of the Twenty-sixth Session, Doc. A/CN.4/SER.A/1974/Add.l, YBILC II(1) (1974) 209, 6 (draft article 14 commentary); Costelloe, Treaty Succession in Annexed Territory 350; R Happ & S Wuschka, Horror Vacui: Or Why BITs Should Apply to Illegally Annexed Territories’ (2016) 33(3) J. Int’l Arb. 245-268 (hereinafter referred to as ‘Happ & Wuschka, Horror Vacui: Or Why BITs Should Apply to Illegally Annexed Territories’) 253; Repousis, Why Russian Investment Treaties Could Apply to Crimea 465; P Dumberry, A Guide to State Succession in International Investment Law (Edward Elgar Publishing 2018) (hereinafter referred to as ‘Dumberry, A Guide to State Succession in International Investment Law’) 191.
13. P Dumberry, ‘Requiem for Crimea: Why Tribunals Should Have Declined Jurisdiction over the Claims of Ukrainian Investors Against Russia under the Ukraine-Russia BIT’ (2018) 9 J. Int’l Disp. Settlement 506-533, 515-6.
14. Third Report on the Law of Treaties of Special Rapporteur Waldock, Doc. A/CN.4/167 and Add. 1-3, YBILC II (1964) [13], [3]; O Corten & P Klein (eds.) The Vienna Conventions on the Law of Treaties: A Commentary (OUP 2011) 737, 17-18.
15. Costelloe, Treaty Succession in Annexed Territory 359-363; O Ben-Naftali and Y Shany, ‘Living in Denial: The Application of Human Rights in the Occupied Territories’ (2003) 37(1) Israel L. Rev. 17-118, 67. See also Armed Activities on the Territory of the Congo (Democratic Republic of the Congo v. Uganda) Judgment [2005] ICJ Rep. 168, 245-8.
16. Douglas, The International Law of Investment Claims 314; Douglas, Property, Investment and the Scope of Investment Protection Obligations 373; A Newcombe & A Paradell, Law and Practice of Investment Treaties – Standards of Treatment (Kluwer Law International 2009) 18-9; Sanum Investments Limited v. Lao People’s Democratic Republic [I] (PCA Case No. 2013-13, Award on Jurisdiction, 13 December 2013) [240].
17. T Ackermann ‘Investments Under Occupation: The Application of Investment Treaties to Occupied Territory’ in K. Fach Gómez et al. (eds.) International Investment Law and the Law of Armed Conflict (European Yearbook of International Economic Law, Springer 2019) 83; Happ & Wuschka, Horror Vacui: Or Why BITs Should Apply to Illegally Annexed Territories 260–262.
18. RA Curry, ‘Oil Rights in the Gulf of Suez’ (1978) 38(4) La. L. Rev. 979-994, 988. A Gerson, ‘Off-Shore Oil Exploration by a Belligerent Occupant: The Gulf of Suez Dispute’ (1977) 71(4) Am. J. Int’l L. 725-733.
19. N McFarquhar, ‘Seizing Assets in Crimea, From Shipyard to Film Studio’, The New York Times, (10 January 2015) available at: <https://www.nytimes.com/2015/01/11/world/seizing-assets-in-crimea-from-shipyard-to-film-studio.html> accessed on 1 February 2020.
20. A Aust, Treaties, ‘Territorial Application’, Max Planck Encyclopedia of Public International Law (OUP online edn, 2006).
21. Azinian, Davitian & Baca v United Mexican States (ICSID Case No. ARB (AF)/97/2, Award, 1 November 1991) [99].
22. E Gromova, ‘The Free Economic Zone of the Republic of Crimea and the Federal City of Sevastopol’ (2018) 6(3) Russ. L. J. 79-99 (discussing the Russian legislation on the establishment of a free economic zone in the territories of the Republic of Crimea and the Federal City of Sevastopol).
23. Mozer v. Moldova and Russia (Application no. 11138/10, ECtHR, Judgment (Merits and Just Satisfaction), 23 February 2016) [107]; Ilaşcu and Others v. Moldova and Russia (Application no. 48787/99, ECtHR, Judgment (Merits and Just Satisfaction), 8 July 2004) [387]-[94]; Loizidou v. Turkey (Application no. 15318/89, ECtHR, Preliminary Objections, 23 March 1995) [57], [62]-[4]; Loizidou v. Turkey (Application no. 15318/89, ECtHR, Judgment (Merits and Just Satisfaction), 18 December 1996) [16], [56]; Al-Skeini and Others v United Kingdom (Application no. 55721/07, ECtHR, Judgment (Merits and Just Satisfaction), 7 July 2011) [138]-[9]; Issa and Others v. Turkey (Application no. 31821/96, ECtHR, Judgment (Merits), 30 March 2005) [76].
24. Happ & Wuschka, Horror Vacui: Or Why BITs Should Apply to Illegally Annexed Territories 253, 255.
25. Costelloe, Treaty Succession in Annexed Territory 373; Dumberry, A Guide to State Succession in International Investment Law 199-200. Ilaşcu and Others v. Moldova and Russia (Application no. 48787/99, ECtHR, Judgment (Merits and Just Satisfaction), 8 July 2004) [330]-[1], [333].