INTERNATIONAL COURT OF JUSTICE
CERTAIN IRANIAN ASSETS
(ISLAMIC REPUBLIC OF IRAN v. UNITED STATES OF AMERICA)
COUNTER-MEMORIAL
SUBMITTED BY
THE UNITED STATES OF AMERICA
October 14, 2019
ANNEXES
VOLUME VIII
Annexes 161 through 182
ANNEX 161
1
CASE No. ARB(AF)/97/2
INTERNATIONAL CENTRE FOR
SETTLEMENT OF INVESTMENT DISPUTES
(ADDITIONAL FACILITY)
B E T W E E N:
ROBERT AZINIAN, KENNETH DAVITIAN, & ELLEN BACA
Claimants
and
THE UNITED MEXICAN STATES
Respondent
AWARD
Before the Arbitral Tribunal
constituted under Chapter Eleven of
the North American Free Trade
Agreement, and comprised of:
Mr Benjamin R. Civiletti
Mr Claus von Wobeser
Mr Jan Paulsson (President)
Date of dispatch to the parties:
November 1, 1999
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TABLE OF CONTENTS
I. The Parties 3
II. Essential Chronology 4
III. Overview of the Dispute 6
IV. The Procedure 9
V. Relief Sought 17
VI. Validity of the Claim under NAFTA 19
VII. Costs 29 28
VIII. Decision 29
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I. THE PARTIES
A. The Claimants
1. The Claimants, Mr Robert Azinian of Los Angeles, California, Mr Kenneth Davitian of Burbank,
California, and Ms Ellen Baca of Sherman Oaks, California, have initiated these proceedings as United
States (hereinafter “U.S.”) citizens and shareholders of a Mexican corporate entity named Desechos Solidos
de Naucalpan S.A. de C.V. (hereinafter “DESONA”). DESONA was the holder of a concession contract
entered into on 15 November 1993 (hereinafter “the Concession Contract”) relating to waste collection and
disposal in the city of Naucalpan de Juarez.
2. In these proceedings, the Claimants are represented by:
David J. St. Louis, Esq.
Law Offices of David J. St. Louis, Inc.
575 East Alluvial
Suite 102
Fresno, California 93720
USA
B. The Respondent
3. In these proceedings the Respondent, the Government of the United Mexican States, is represented
by:
Lic. Hugo Perezcano Díaz
Consultor Jurídico
Subsecretaría de Negociaciones Comerciales Internacionales
Dirección General de Consultoría Jurídica de Negociaciones
Secretaría de Comercio y Fomento Industrial
Alfonso Reyes No.30, Piso 17
Colonia Condesa
México, Distrito Federal, C.P.06149
México
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II. ESSENTIAL CHRONOLOGY
4. In early 1992, the Mayor of Naucalpan and other members of its Ayuntamiento (City Council)
visited Los Angeles at the invitation of the Claimants to observe the operations of Global Waste Industries,
Inc., a company said by the latter to be controlled by them.
5. On 7 October 1992, Mr Azinian, writing under the letterhead of Global Waste Industries Inc.
(hereinafter “Global Waste”) as its “President,” sent a letter to the Mayor of Naucalpan containing a
summary of the way “we expect to implement … the integral solution proposed for the solid waste
problem” of the city. The following representations were made:
(1) “The company will replace all the current collection equipment for advanced technology in
the area of solid wastes” – specifically including watertight vehicles and metal bins.
(2) “The necessary investment to implement an efficient and hygienic solid waste collection,
transportation and processing system is approximately US$ 20,000,000,” of which 50%
“will be directed to the acquisition of collection equipment.”
(3) “GLOBAL WASTE INDUSTRIES, INC. is a company specialized in the collection and
reduction of solid wastes. With more than 40 years of experience, GLOBAL WASTE
provides collection services to residences, businesses and industry in the Los Angeles area.”
6. In the course of a session of the Ayuntamiento on 4 November 1992, the “Integrated Solution
Project” was presented. It was described as involving a consortium including Sunlaw Energy Inc., a U.S.
corporation experienced in the conversion of bio-mass to energy, and an investment of US$ 20 million.
7. However attractive it found this proposal, the Ayuntamiento was not in a position to grant the
envisaged 15-year Concession Contract due to its own limited mandate; Mexican law requires, in such a
context, approval from the relevant State legislature. Accordingly the project was presented in late July
1993 to a legislative committee. In support of the project, Mr Ariel Goldenstein, a close business associate
of the Claimants, and the future general manager of DESONA, said that “our company has been working in
the U.S. for more than 40 years.” Naucalpan’s Director of Economic Development said “that’s why we
chose Global Waste.” Naucalpan’s Mayor referred to the Claimants’ “more than 40 years experience in this
area, in the city of Los Angeles, in a county that as you know has more than 21 million inhabitants.”
(Respondent’s translation of the United Legislature Committee Meeting, 22 July 1993, Annex One,
Respondent’s Rejoinder, pp. 1, 4 and 10.)
8. On 15 August, legislative approval of the proposed Concession Contract was published in the
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official gazette, triggering a 90-day limit for its signature.
9. On 15 November, the Concession Contract was signed. Two days later DESONA commenced its
commercial and industrial waste collection, using two reconditioned front-load vehicles.
10. On 13 December, DESONA commenced residential waste collection for the Satélite section of
Naucalpan but did not supply the five rear-load vehicles as provided for by the schedule of operations
under the Concession Contract. Until the termination of the Concession Contract, the two initial frontloaders
remained the only units of the 70 “state-of-the-art” vehicles called for under the Concession
Contract to be put into service by DESONA.
11. On 1 January 1994, a new administration took over the Naucalpan Ayuntamiento. (It represented
the same political party.)
12. In January and February, there were a number of meetings between the personnel of DESONA
and the Ayuntamiento concerning implementation of the Concession Contract. The Ayuntamiento was
particularly concerned by the absence of new vehicles, which DESONA explained was due to difficulties in
obtaining import permits for which it could not be faulted.
13. In mid-February, the Ayuntamiento sought independent legal advice about the Concession
Contract. It was advised that there were 27 “irregularities” in connection with the conclusion and
performance of the Concession Contract.
14. On 7 March, the Ayuntamiento decided to disclose the perceived irregularities to DESONA and to
give it an opportunity to respond.
15. On 10 March, in the presence of Mr Davitian and local counsel to DESONA, the charges were
read out and DESONA was directed to respond to them by 17 March.
16. On 15 March, DESONA initiated proceedings before the State Administrative Tribunal seeking
nullification of the Ayuntamiento’s decision (of 7 March) to question the Concession Contract.
17. On 21 March, despite a protest from DESONA on 16 March, the Ayuntamiento decided to annul
the Concession Contract. The Claimants were notified of this decision two days later.
18. On 11 April, DESONA amended its claim before the State Administrative Tribunal to include
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nullification of the Ayuntamiento’s decision of 21 March.
19. On 1 June, DESONA was given an opportunity to present its case to an extraordinary session of
the Ayuntamiento. Mr Goldenstein appeared on behalf of DESONA.
20. On 14 June, the Administrative Tribunal heard DESONA’s claims, and dismissed it by a judgment
of 4 July.
21. On 13 July, DESONA appealed to the Superior Chamber of the Administrative Tribunal, which
upheld the Ayuntamiento’s annulment of the Concession Contract by a judgment dated 17 November. The
Superior Chamber held that of the 27 alleged irregularities, nine had been demonstrated. Of these, seven
related to various perceived misrepresentations by the Claimants in connection with the conclusion of the
Concession Contract.
22. On 10 December, DESONA lodged a further appeal, in the form of a so-called amparo petition, to
the Federal Circuit Court.
23. On 18 May 1995, the Federal Circuit Court ruled in favour of the Naucalpan Ayuntamiento,
specifically upholding the Superior Chamber’s judgment as to the legality of the nine bases accepted for the
annulment.
24. On 17 March 1997, the Claimant shareholders of DESONA initiated the present arbitral
proceedings against the Government of Mexico under Chapter Eleven of the North American Free Trade
Agreement (hereinafter “NAFTA”), by submitting a claim to arbitration pursuant to Article 1137(1)(b)
thereof.
III.OVERVIEW OF THE DISPUTE
25. Naucalpan is an important and heavily industrialised suburb of Mexico City. In 1993, when the
Concession Contract was signed, it had a population of nearly two million, and 21,800 commercial or
industrial establishments. Residential and business waste management was, and remains, an important
function of the municipal authorities. Somewhat more than 900 tonnes per day of residential waste were
collected, and somewhat less than 900 tonnes per day of commercial and industrial waste. (The latter
generates higher revenues for the provider of collection and disposal services.) When DESONA entered the
scene, collection, treatment, and disposal left much to be desired. The municipality’s equipment was
inadequate and obsolete.
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26. As conceived, the Claimants’ project in fact aimed at a far greater prize than earnings from local
waste disposal services. Their ambition was that this would be a pilot project which would ultimately
spawn major industries, beginning with the modernisation of waste disposal throughout Mexico and
extending to important profitable sidelines:
• the manufacture in Mexico of modern specialised vehicles, not only for the Mexican market but
also Central and South America,
• the recycling of waste, notably to produce cardboard, and
• the erection of power generation plants to convert landfill bio-gases into electricity; revenues
from these plants would be used in part to finance the improvement of the waste disposal
infrastructure.
27. Once armed with a long-term contract with one important Mexican city, the Claimants hoped to
interest third parties having greater financial resources and expertise to join forces with them, thus allowing
the Claimants to leverage their modest means into a profitable position within a grand scheme. In some
correspondence, this was referred to as a “Newco” to which DESONA would somehow assign its
operations in Naucalpan. During the hearings before the Arbitral Tribunal, the plan to use the initial
concession to entice new participants was referred to on a number of occasions as “taking the show on the
road.” In his oral testimony, Mr Goldenstein explained that the Claimants’ anticipated US$ 20 million
investment should have been understood as funded by Sunlaw Energy (English Transcript 21.6.99, p. 296,
l. 8 and p. 298, l. 9-10). He did not explain how US$ 20 million could suffice to build a 200 megawatt
power generating plant. More importantly, he could not point to any evidence that any Mexican authority
had been appraised prior to signature of the Concession Contract that Sunlaw had lost interest in the
project, with the result that it would no longer provide a source of funding. To the contrary, the Concession
Contract retained the provision about the generating plant, which appears in Article 11 of the signed
document.
28. Today, as a result of the cancellation by the City of Naucalpan of DESONA’s Concession
Contract, the Claimants, as shareholders in DESONA, are seeking recovery of the loss of the “value of the
concession as an on-going enterprise.” The highest of their alternative methods of evaluation (see Section
V) results in a figure of some US$ 19.2 million. The Claimants allege that the actions of the Ayuntamiento
of Naucalpan resulted in a violation of NAFTA, attributable to the Government of Mexico.
29. There are some immediately apparent difficulties with the claim. It must be said that this was not
an inherently plausible group of investors. They had presented themselves as principals in Global Waste,
with approximately 40 years’ experience in the industry. In fact Global Waste had been incorporated in Los
Angeles in March 1991, but put into bankruptcy in May 1992 – 14 months later. Global Waste owned no
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vehicles, and in the year preceding its bankruptcy had had revenues of only US$ 30,000. The only Claimant
who could be said to have experience in the industry was Mr Davitian, whose family had been in the
business of waste disposal in the Los Angeles area. In reality, Mr Davitian was the only Claimant to hold
shares (15%) in Global Waste. (Mr Goldenstein testified that there was an understanding that he, Mr
Davitian, and Mr Azinian were each to be treated as one-third beneficial owners of Global Waste, but this
was not reflected in formal ownership because it was a so-called Subchapter S corporation and for U.S. tax
purposes could not include foreign shareholders; English Transcript, 21.6.99, p. 294, l. 2.) Even in the case
of Mr Davitian personally, since he was precisely 40 years old in 1993, a claim of 40 years’ experience was
preposterous.
30. As for the other Claimants: Mr Azinian had no relevant experience, had a long record of
unsuccessful commercial litigation, and had been declared personally bankrupt in 1991. Mr Goldenstein
had a background in a family property business in Argentina and in restaurant management in the U.S., and
claims expertise in the financing of major motion picture projects as a result of his studies in Los Angeles.
Mr Goldenstein was never a shareholder in Global Waste but addressed Mexican authorities on its behalf.
He was described by the Claimants’ counsel as “the person that is most knowledgeable from Claimants’
point of view as to all of the transactions that are involved here.” (English Transcript, 21.6.99, p. 21, l. 12)1
31. None of this background was disclosed to the Naucalpan authorities. The Naucalpan authorities
thus entrusted a public service to foreign individuals whom they were falsely led to believe were part of an
experienced concern possessed of financial and technological resources adequate for the job.
32. Nor were there, as of the date the Concession Contract was concluded, firm commitments from
the various third parties whose involvement was necessary if the venture was to evolve from a pilot project
to achieve grandiose further objectives – or even if the basic engineering services and equipment under the
Concession Contract were to be provided. The landfill gas conversion scheme appears to have been a
fantasy, for a number of elementary practical reasons including the fact that landfill gases could not supply
more than a fraction of the required raw materials. (As much as 95% of the natural gas would have to be
purchased from PEMEX, whose attitude toward the prospect of this new source of electric energy may
have been hostile.) The capacity of the power plant contemplated under the Concession Contract was
astonishing. To generate 200 megawatts would likely have required investments far in excess of US$ 100
million. Such a plant would have been four times the size of the largest landfill-connected power plant in
the U.S. In fact Sunlaw Energy, the U.S. corporation which was to finance the acquisition of a new waste
collection fleet through the power generation project, backed away from the project shortly before the
1 Mr Goldenstein is not one of the Claimants because as an Argentine national he has no standing under NAFTA.
Ms Baca, on the other hand, is a Claimant as a result of a property settlement in her divorce from Mr Davitian, and
appears to have had no substantive role in the project.
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Concession Contract was signed, thus apparently leaving the Claimants with few sources of funds other
than the anticipated revenues from the rate-payers of Naucalpan. Given that the city budget had no
provision for the acquisition of new equipment, this can hardly be viewed as a healthy situation.
33. During the brief period of putative performance of the Concession Contract, the Claimants gave
every impression of living hand to mouth, barely able to finance the acquisition of merely two vehicles
(and reconditioned at that, not new), or even meeting a payroll. And yet, on the very day when the
Concession Contract was presented to the Naucalpan City Council for approval, Mr Goldenstein had
reaffirmed that the project investment would be approximately US$ 20 million. The evidence compels the
conclusion that the Claimants entered into the Concession Contract on false pretences, and lacked the
capacity to perform it.
34. The new city authorities who took over on 1 January 1994 exhibited little inclination to work
things out with DESONA or its principals, but instead handed them a list of 27 putative grounds of
termination. It should be made clear that the Arbitral Tribunal makes no criticism of Mr Francesco
Piazzesi, who became Naucalpan’s Director of Economic Development in January 1994. Mr Piazzesi
appeared before the Arbitral Tribunal and gave a credible account of his actions. Indeed, Mr Piazzesi
testified that his personal recommendation in March 1994 was that the Concession Contract should not be
annulled at that time (English Transcript, 23.6.99, p. 130, l. 5-6). The reason this recommendation was not
followed remains unexplained, understandably leading Mr St. Louis, for the Claimants, to castigate the
Respondent for having adopted an “empty chair” policy in not producing other officials as witnesses. The
list itself ignores the 30-day cure period defined in the Concession Contract. The Claimants insist that they
were in a position to remedy the shortcomings and to perform their obligations.
35. The summary above explains the background of the Claimants’ challenge to the validity of the
purported termination of the Concession contract, as well as the opposing thesis of the Ayuntamiento of
Naucalpan to the effect that the Concession Contract was either void for misrepresentations, or rescindable
for failure of performance. Before going any further, the Arbitral Tribunal must satisfy itself that this
debate may be subjected to a full substantive review before a NAFTA Tribunal. The Arbitral Tribunal is
not so satisfied, and that, in the circumstances more fully described and for reasons stated in Section VI,
suffices to resolve this case.
IV.THE PROCEDURE
36. On 24 November 1996, the Claimants sent to the Respondent a “Preliminary Notice of Intention to
File a Claim and Consent of Investors” which recited that it was made “under Part 5, Chapter 11,
Subchapter B of NAFTA as a result of an expropriation of a business venture by the City of Naucalpan de
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Juarez, Estado de Mexico and against the Federal Government of Mexico.” The Claimants thereby
explicitly waived their rights to “further court or administrative proceedings regarding this claim pursuant
to [NAFTA] Article 1121(1) and (2).”
37. A more detailed document from the Claimants entitled “Notice of Intent to Submit a Claim to
Arbitration” was received by the Respondent on 10 December 1996; on 16 December, it received a slightly
modified version, entitled “Amended Notice of Intent to Submit a Claim to Arbitration.”
38. By a Notice of Claim dated 10 March 1997, submitted as of 17 March, the Claimants requested
the Secretary-General of the International Centre for Settlement of Investment Disputes (hereinafter
“ICSID”) to approve and register their application for access to the ICSID Additional Facility, and
submitted their claim to arbitration under ICSID Additional Facility Rules.
39. On 24 March 1997, the Acting Secretary-General of ICSID informed the Parties that the
requirements of Article 4(2) of the ICSID Additional Facility Rules had been fulfilled and that the
Claimants’ application for access to the Additional Facility was approved, and issued a Certificate of
Registration of the case.
40. Following appointments in due course, the Acting Secretary-General of ICSID informed the
Parties that the Arbitral Tribunal was “deemed to have been constituted and the proceedings to have begun”
on 9 July 1997, and that Mr Alejandro A. Escobar, ICSID, would serve as Secretary of the Arbitral
Tribunal. All subsequent written communications between the Arbitral Tribunal and the parties were made
through the ICSID Secretariat. (All references to “ICSID” below are to the ICSID Secretariat.)
41. The first session of the Arbitral Tribunal was held, with the Parties’ agreement, in Washington
D.C. on 26 September 1997. It resulted in further agreement on a number of procedural matters reflected in
written minutes signed by the President and Secretary of the Tribunal. Toronto was selected as the formal
seat of arbitration by agreement among the Parties and the Arbitral Tribunal.
42. During the course of the procedural hearing, the Respondent questioned the standing of the
Claimants. The Arbitral Tribunal indicated that this matter should be resolved before the consideration of
the merits. It was agreed that the Respondent would submit by 6 October 1997 a written motion regarding
the issue of the Claimants’ standing. The Claimants would then submit a written answer, and the
Respondent would then be given an opportunity to present a final written reply thereto.
43. ICSID received the Respondent’s Motion for Directions (hereinafter “the Motion”) on 6 October
1997. Therein the Respondent challenged the Claimants’ standing under NAFTA. Specifically, the
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Respondent requested that the Claimants demonstrate:
“(i) for each of them, their standing to invoke Section B of Chapter Eleven; (ii) if they
have such standing, whether they are advancing a claim under Article 1116 (…) or
Article 1117; (iii) if the claim is being asserted under Article 1117, whether it is being
asserted by the investor who owns or controls the enterprise; and (iv) in either event, that
the enterprise which any of them claim to own or control, or in which any of them claim
to have an equity, security or other interest was, at the material times, a valid and
subsisting corporate entity, duly incorporated under applicable Mexican law.”
44. The Motion also stated that it was critical that the enterprise alleged to have been harmed “has
validly authorised the submission of the claim to arbitration.”
45. In response, the Claimants submitted their Reply to the Motion for Directions dated 5 November
1997 in which they sought to demonstrate that: Article 1117(3) of NAFTA “expressly contemplates” that
an investor may bring a claim under Article 1116 and 1117; that the Claimants have standing as per Article
1139’s definition of “investor” and “investment;” and that the “valid subsisting” corporate entity referred to
in the Respondent’s Motion held the concession at the material times, and duly authorised the submission
of the claim.
46. The “Respondent’s Response to Claimants’ Reply to the Mexican Government’s Motion for
Directions Regarding Standing to Submit a Claim to Arbitration” (hereinafter “the Response”) was
received by ICSID on 12 December 1997. Therein the Respondent reiterated its claim to have the issues
concerning the nature of the claim and of the Claimants’ respective standing resolved prior to the
consideration of the merits. Furthermore, the Respondent questioned the adequacy of the evidence
submitted by the Claimants purporting to support their right to invoke Section B of NAFTA.
47. By letter dated 16 December 1997, the Claimants requested an extension of a month in which to
submit the Memorial. The Tribunal acceded by letter of 17 December 1997.
48. In an “Interim Decision Concerning Respondent’s Motion for Directions” (hereinafter “the Interim
Decision”) dated 22 January 1998, the Arbitral Tribunal ruled that although “the pleadings (…) raise a
number of complex issues which may have the effect of restricting the competence of the Tribunal (…)
they seem unlikely to eliminate altogether the need to consider the merits,” and thus the issue of standing
would be dealt with in the pleadings on the merits. In particular, the Tribunal made the following four
observations: that if part of Mr Azinian’s claim was made by him as an “impermissible surrogate” for Mr
Goldenstein, this could be determined by the Tribunal at a later stage as it would affect the quantum but not
Mr Azinian’s standing pro se; that if it was true that Mr Davitian was not a shareholder at the material
time(s) this might defeat his standing but would not obviate the consideration of the merits, nor would his
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“provisional presence” as a claimant complicate the facts to be tried on the merits; that if Messrs Azinian
and Davitian were trying to introduce claims outside the jurisdiction of the Tribunal as established by the
NAFTA, this could be dealt with in due course; and that although the Claimants have identified “DESONA
B” as the entity harmed by the allegedly wrongful actions of the Respondent and although the
complications relating to the various forms of “DESONA” will form part of the merits, neither “DESONA
A” nor “DESONA B” is a claimant.
49. On 28 January 1998, the Claimants submitted their Memorial which the Respondent received on
10 February 1998.
50. On 1 April 1998, the Respondent filed a second Motion for Directions (hereinafter “the Second
Motion”) seeking further particulars and the production of additional documents. The Respondent also
requested the Tribunal to direct that the running of time for the filing of the Counter-Memorial be
suspended until the Claimants produced the particulars and documents detailed in the Second Motion.
51. The Claimants, by letter dated 9 April 1998, declared themselves amenable to producing the
documents sought and “the documentary evidence called for by Mexico’s Request for Particulars (…)
without the necessity of a ruling by the Tribunal.”
52. The Arbitral Tribunal ruled on the Second Motion by letter dated 27 April 1998, stating that it
would:
“await the production of information voluntarily proposed by the Claimants. Upon receipt
thereof, the Respondent is invited forthwith to inform the Arbitral Tribunal whether it
still considers it necessary to apply for any additional ruling(s), and to request a
reasonable adjustment of the time-limit for its Counter-Memorial.”
53. The Claimants complained by letter dated 5 May 1998 that the Respondent was violating Rule 43
of the ICSID Additional Facilities Rules by contacting the Claimants’ witnesses. The Claimants asked the
Tribunal to establish an understanding to the effect that witnesses cited by one side should not be contacted
unilaterally by the other side. By letter dated 6 May 1998, the Tribunal inquired if the Respondent had any
objection to complying with the understanding proposed by the Claimants.
54. The Respondent replied by letter dated 12 May 1998, contending that interviewing non-party
witnesses about statements made in the Claimants’ Memorial in no way contravened the Additional Facility
Rules of ICSID and that the Respondent “should be free to gather information from non-party witnesses as
it sees fit” given that “it is a well-established principle that a party has no property in a witness.” With
regard to Rule 43, the Respondent submitted that it regulates questions arising during the oral procedure
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only.
55. By letter dated 18 May 1998, the Claimants answered the Respondent’s letter of 12 May 1998,
conceding that a party has no property in a witness but reaffirming their initial point that “such contact [that
of the Respondent with regard to the Claimants’ non-party witnesses] is designed to develop impeaching
information as to the sworn statements obtained without the presence of opposing counsel.” The Claimants
went on to state that “(i)t is quite clear that (sic) Respondent is attempting to adduce extra-judicial evidence
through ‘other means’ and, therefore, these extra judicial examinations do fall (…) under Article 43, which
confirms authority on the panel to issue protective orders. It is a fundamental rule of law that the Tribunal
does have the power and the authority to conduct its proceedings in an orderly fashion with a view towards
fairness to both sides.” The Respondent replied by letter on 20 May 1998, reiterating the points made in its
communication of 12 May 1998.
56. The Arbitral Tribunal ruled, by letter dated 19 June 1998, on the complaint concerning interviews
by one Party of witnesses whose written statements have been introduced by its opponent, as follows:
“The Arbitral Tribunal considers that the issues raised by the Claimants are not dealt with
by the ICSID Additional Facility Rules. Nor is the Arbitral Tribunal aware of any basis
on which it could preclude communications between a party and a third-party witness.
The Arbitral Tribunal accordingly advises the parties as follows:
1. The Arbitral Tribunal declines to restrict any party’s ability to interview witnesses
who freely choose to meet with that party’s representative(s).
2. During any such interview, the witness is (as far as the Arbitral Tribunal is
concerned) free to answer or decline to answer individual questions as he or she
sees fit.
3. The Arbitral Tribunal expects that any such witnesses would be informed, in
advance, by the party seeking to meet him or her that his or her legal counsel may
be present at any interview.
4. Statements made by a witness during any such interview shall not be received into
evidence.
5. The only testimony to be given probative value is that contained in signed written
statements or given orally in the presence of the Arbitral Tribunal.
6. The Arbitral Tribunal does not require that any party which secures the agreement
of a witness to a meeting give the other side an opportunity to be present during
that meeting; whether a witness makes the presence of both sides a condition for
accepting such a meeting is not a matter for the Arbitral Tribunal.”
57. In the interim, on 18 May 1998, ICSID had received the Claimants’ Response to the Respondent’s
second Motion for Directions of 1 April 1998.
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58. On 8 June 1998, the Respondent filed a “Motion for Directions to Answer Request for Particulars
and Produce Documents” in which it renewed the demands of its Second Motion for Directions. It
requested that the Arbitral Tribunal direct the Claimants to give further particulars and produce additional
documents; and that the time for filing the Counter-Memorial be suspended until the Claimants complied
with the requested direction of the Tribunal. On 18 June 1998, the Claimants replied to this third Motion
for Directions by letter. They claimed that they had responded to the best of their ability to the prior Motion
for Directions and requested that the Tribunal direct the Respondent to submit their Counter-Memorial.
59. The Arbitral Tribunal, by letter dated 22 July 1998, declined to rule on the Respondent’s Motion
for Directions of 8 June 1998, noting that the Respondent would have a full opportunity to comment on
“perceived deficiencies” in its Counter-Memorial. Furthermore, it instructed the Respondent to submit its
Counter-Memorial by 1 October 1998.
60. On 5 October 1998, ICSID received a partial version of the Respondent’s Counter-Memorial. It
received the remaining portions on 23 October 1998, following a letter from the Claimants dated 20
October 1998, complaining of the delay and requesting a 45-day period for the Reply and an additional 30
days for the Rejoinder. The Respondent objected to a second round of written pleadings by letter dated 28
October 1998 and requested that the Claimants “express in detail its reasons that would justify submitting a
reply and [a] rejoinder.”
61. By letter of 30 October 1998, the Claimants responded on the issue of further written pleadings,
invoking Article 38(3) of the ICSID Rules as grounds for a second round of pleadings and describing their
purpose as follows:
“(a) Identify matters of common ground in submissions both as to law and fact; (b)
Respond to the Government of Mexico’s characterization of pertinent law and its
application to the issues in this case; (c) Address specific considerations bearing upon the
respective parties’ burden of proof with reference to competent evidence; and (d) Reply
to the accusations of bias, lack of creditability and outright wrong-doing directed at the
majority of the Claimants’ witnesses.”
62. By letter dated 10 November 1998, the Respondent rebutted the Claimants’ letter of 30 October
1998, stating that the Claimants had not demonstrated that a second round of written pleadings was
necessary, the reasons given being just as easily capable of being addressed in the oral proceedings. It went
on to demand that, in the event the Arbitral Tribunal were to deem that a Reply and a Rejoinder are
necessary, such a Reply be limited to issues that “the Tribunal agrees are properly the subject of a Reply to
the Counter-Memorial in the circumstances of this case.” Furthermore, the Respondent opposed the
Claimants’ earlier request to tender “DESONA’s operating journals, reconstructed from old records, which
the Claimants refused to produce in response to the Respondent’s repeated requests.” In paragraph 18 of
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this letter, the Respondent stated in particular:
“If the Tribunal determines to allow any type of Reply relating to this category of
information, it should (i) require the Claimants to describe with particularity which issues
they wish to address, (ii) ensure that the list includes only matters that the Tribunal deems
as “new” issues raised for the first time in the Counter-Memorial, and (iii) expressly
forbid the Claimants from including other issues or legal argumentation in their Reply.”
63. The decision of the Arbitral Tribunal concerning the filing of a Reply and a Rejoinder was given
by letter dated 24 November 1998. It directed the parties to prepare a further round of written pleadings as
“the oral phase of the proceedings is likely to be better focussed by allowing Reply and Rejoinder
Memorials,” and stated that:
“(a)t the same time, the Tribunal acknowledges that many of the observations made in the
Respondent’s letter of 10 November are pertinent in principle, such as the restrictive
criteria listed in paragraph 18. It would not, however, be efficient to initiate a separate
preliminary debate over the permissible scope of a Reply which is yet to be submitted. It
should be enough for the Tribunal to exhort the parties to ensure that their respective final
Memorials are responsive to their opponent’s previous submissions, and be organised in
such a way that this responsive character is plain to see.
The same reasoning applies to evidence in support of a Reply or Rejoinder, including the
DESONA operating journals. The Tribunal notes that the Respondent at one point called
for the production of such evidence, and still suggests that it was not previously produced
because it “would severely undermine the validity of [the Claimants’] experts’ so-called
‘indications of value’.” (Paragraph 34 of 10 November letter.) While the Respondent
asserts that it would at this stage suffer prejudice if such materials are produced, because
it may have to develop new counter-arguments and indeed new analyses to serve as
support for those counter-arguments, the Tribunal does not view this objection as
decisive. In the first place, in as much as it could be raised against any evidence
accompanying any Reply the objection goes too far to be acceptable in principle.
Secondly, there is no basis to rule a priori that it would be particularly burdensome to
deal with the materials the Claimants wish to produce. (With respect to operating logs, it
is the experience of the Tribunal that notwithstanding their typical bulkiness they are not
necessarily difficult to interpret with respect to basic information such as productivity and
downtime.)
In view of the above, and having furthermore regard to the fact the Claimants have had
time to consider the Counter-Memorial, the Tribunal instructs the parties to proceed as
follows:
(1) The Claimants to file their Reply by 19 January 1999.
(2) The Respondent to file its Rejoinder by 19 April 1999.” (Emphasis in original.)
64. By letter dated 12 January 1999, the Claimants requested permission to file their Reply on 20
January 1999 due to a national holiday on 18 January 1999. The extension was granted by letter of 13
January 1999 in which the Tribunal also fixed the week of 21 June 1999 for the hearing in Washington
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D.C. in accordance with Article 39 of the Additional Facility Arbitration Rules.
65. The Claimants submitted the English version of their Reply on 20 January 1999. The members of
the Tribunal, unlike the Respondent and ICSID, did not receive sets of the Annex containing, according to
the Claimants, “approximately two thousand pages of checks and invoices.”
66. The Spanish version of the Reply was received by ICSID on 9 February 1999. Given the delay in
filing the Claimants agreed to an extension of the time period for filing the Rejoinder for the period that the
Claimants were delayed in completing the filing of their Reply. Thus, the Tribunal informed the parties by
letter dated 17 March 1999, that the Rejoinder was due by 10 May 1999. The Respondent requested an
extension by letter dated 3 May 1999, in order to file the Rejoinder on 17 May 1999. By letter of 7 May
1999, the Tribunal decided that the English version of the Rejoinder and its accompanying documentation
should be filed by 14 May 1999, and the Spanish version by 17 May 1999. ICSID received the Rejoinder,
in both its English and Spanish versions with their accompanying documentation, on 17 May 1999.
67. During the written phase of the pleadings, written statements from the following persons were
submitted by the parties: by the Claimants, Robert Azinian, Kenneth Davitian, Ellen Baca, Ariel
Goldenstein, Basil Carter, Ted Guth, Bryan A. Stirrat, David S. Page, William Roth-rock, Richard Carvell,
Ernst & Young, and Robert E. Proctor; by the Respondent, Raúl Romo Velázquez, James Hodge, J.
Cameron Mowatt, Carlos Felipe Dávalos, Francesco Piazzesi di Villamosa, Patricia Tejeda, Emilio
Sánchez Serrano, Oscar Palacios Gómez, and David A. Schwickerath. The Claimants’ Reply, at Section V,
contained responses to the witness statement and expert reports submitted by the Respondent in its
Counter-Memorial. In addition to offering such responses as rebuttal of certain of the Respondent’s witness
statements (namely, those made by Mr Romo Velázquez, by Mr Hodge, by Mr Piazzesi, by Ms Tejeda, by
Mr Sánchez Serrano and by Dr Palacios Gómez), Claimants argued that the statement made by Mr Mowatt
was legally objectionable and inadmissible in view of the Tribunal’s directions of 19 June 1998. In the
event, the Arbitral Tribunal has not had regard to Mr Mowatt’s statement.
68. By letter of 19 May 1999, the Tribunal informed the parties of the procedural arrangements for the
hearing on the merits, and asked the Parties to provide a list of the witnesses and experts that they wished to
examine.
69. By letter of 24 May 1999, the Respondent stated that it would require the following witnesses to
be available for cross-examination: Ariel Goldenstein; Bryan A. Stirrat; Kenneth Davitian; Robert Azinian;
Ronald Proctor; David S. Page; William Rothrock; and Basil Carter.
70. By letter of the same date, the Claimants requested that the Respondent make available for cross-
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examination the following witnesses: Oscar Palacios; Francesco Piazzesi di Villamosa; and Raul Romo
Velázquez.
71. The Claimants, by letter of 2 June 1999, responded to the Respondent’s earlier request and stated
that Basil Carter and William Rothrock would be unable to attend the scheduled hearings in person but that
they could be cross-examined by videoconference or telephone. Furthermore, Bryan A. Sirrat would only
be able to attend on 21 June 1999. The Claimants expressed their intention to have the following
individuals attend on their behalf to conduct cross-examination: David J. St. Louis; Clyde C. Pearce; Jack
C. Coe; Peter Cling; and William S. Dodge. The Respondent replied by letter dated 4 June 1999 and
suggested that it contact the Claimants to discuss alternative arrangements for those witnesses unable to
attend the hearings. For example, it proposed that the individuals in question be excused from the hearings
on the condition that they answer a limited list of admissions to be provided by the Respondent. The
Claimants answered by letter of 8 June 1999 and stated that they would solicit the approval of David Page,
Basil Carter and William Rothrock to the Respondent’s suggestion regarding the witnesses’ answers to
written questions.
72. Of the Claimants’ witnesses, Messrs Stirrat, Proctor, Goldenstein and Carter appeared at the
hearing. Mr Davitian, although excused by the Respondent, was allowed to give direct rebuttal evidence.
The Respondents excused Messrs Azinian and Page. Mr Rothrock did not appear at the hearing and the
Respondent stated that it would make submissions as to the weight to be given to his written statement. Of
the Respondent’s witnesses, Mr Piazzesi appeared at the hearing. The Claimants excused Dr Palacios and
agreed with Respondent to file certain written admissions in lieu of the testimony of Mr Romo, who was
not present at the hearing.
73. At the conclusion of the examination of witnesses, the Tribunal sought the parties’ confirmation
that the evidentiary phase of the proceeding was closed to the satisfaction of each side, to which both
parties agreed (English Transcript, 23.6.99, p. 149 l. 13-19).
74. The parties filed post-hearing submissions on 16 July 1999.
V. RELIEF SOUGHT
75. The Claimants contend that “the City’s wrongful repudiation of the Concession Contract violates
Articles 1110 (“Expropriation and Compensation”) and 1105 (“Minimum Standard of Treatment”) of
NAFTA” (Reply of 19 January 1999, Sec. III, p. 17), and accordingly seek the following relief, as
articulated in their Prayer for Relief dated 23 June 1999:
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“A. With respect to the enterprise, as follows:
1. The value of the concession as an ongoing enterprise on March 21, 1994, the
date of the taking based upon the values obtained:
a. By applying the Discounted Cash Flow (DCF) method in the amount
of US$11,600,000 (PCV);
In the alternative,
b. By applying the Similar Transaction Method yielding an amount of
US$19,203,000 (PCV);
In the alternative,
c. Based upon the offer made by Sanifill to purchase the concession in an
amount of US$18,000,000;
In the alternative,
d. Based upon the lower range value from the fair market value analysis
of the concession conducted by Richard Carvell in an amount of
US$15,500,000;
In addition:
2. Interest on the amount awarded as the value of the concession as set forth in
section A above from the date of the taking at the rate of 10% per annum to
the date of the award;
3. Cost of the proceedings, including but not limited to attorneys fees, experts
and accounting fees and administrative fees;
4. Simple interest on the entirety of the award accruing from and after the date of
the award until the date of payment at 10% per annum;
As a separate and distinct prayer, Claimants request relief as follows:
1. Out of pocket expenses in the amount of US$3,600,000 (Memorial Section 6
Page 2);
2. Interest on the amount awarded as out of pocket expenses from the date of the
taking at the rate of 10% per annum to the date of the award;
3. Cost of the proceedings, including but not limited to attorneys fees, experts
and accounting fees and administrative fees;
4. Such additional amount as shall be fixed by the Tribunal to compensate for
the loss of the chance or opportunity of making a commercial success of the
project;
5. Simple interest on the entirety of the award accruing from and after the date of
the award until the date of payment at 10% per annum;
B. NOTE: Claimants acknowledge as an offset amounts received from a partial sale of
assets in the amount of US$500,000, credit for which should be given as of the date
of receipt of such funds by the claimants or on their behalf on May 20, 1994;
C. With respect to Claimants individually, relief as requested herein should be
allocated as follows:
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To Robert Azinian 70%
To Ellen Baca 20%”
76. The Respondent asks that the claim be dismissed with costs assessed against the Claimants.
VI.VALIDITY OF THE CLAIM UNDER NAFTA
A. The general framework of investor access to international arbitration under NAFTA
77. For the purposes of the present discussion, the Claimants are assumed to be “investor[s] of a
Party” having made an “investment” as those two terms are defined in Article 1139 of NAFTA. The
Respondent has raised questions as to the permissibility of claims being made by a formally qualified
shareholder on behalf of a beneficial owner who is not a national of a NAFTA Party. (In this case, a portion
of Mr Azinian’s shareholding in DESONA is said to be beneficially owned by Mr Goldenstein, who is not
a national of a NAFTA Party.) The Respondent has also challenged Mr Davitian’s status as a shareholder
of DESONA at the time material for entitlement to claim under NAFTA. In its Interim Decision of 22
January 1998 (see paragraph 48), the Arbitral Tribunal determined that those objections need only be
decided if there is some degree of liability on the merits, for only then would it be necessary to decide
whether recovery should be excluded on account of these allegedly non-qualified investments.
78. The Ayuntamiento as a body determined that it had valid grounds to annul and rescind the
Concession Contract, and so declared. DES-ONA then failed to convince three levels of Mexican courts
that the Ayuntamiento’s decision was invalid. Given this fact, is there a basis for the present Arbitral
Tribunal to declare that the Mexican courts were wrong to uphold the Ayuntamiento’s decision and that the
Government of Mexico must indemnify the Claimants?
79. As this is the first dispute brought by an investor under NAFTA to be resolved by an award on the
merits, it is appropriate to consider first principles.
80. NAFTA is a treaty among three sovereign States which deals with a vast range of matters relating
to the liberalisation of trade. Part Five deals with “Investment, Services and Related Matters.” Chapter
Eleven thereunder deals specifically with “Investment.”
81. Section A of Chapter Eleven establishes a number of substantive obligations with respect to
investments. Section B concerns jurisdiction and procedure; it defines the method by which an investor
claiming a violation of the obligations established in Section A may seek redress.
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82. Arbitral jurisdiction under Section B is limited not only as to the persons who may invoke it (they
must be nationals of a State signatory to NAFTA), but also as to subject matter: claims may not be
submitted to investor-state arbitration under Chapter Eleven unless they are founded upon the violation of
an obligation established in Section A.
83. To put it another way, a foreign investor entitled in principle to protection under NAFTA may
enter into contractual relations with a public authority, and may suffer a breach by that authority, and still
not be in a position to state a claim under NAFTA. It is a fact of life everywhere that individuals may be
disappointed in their dealings with public authorities, and disappointed yet again when national courts
reject their complaints. It may safely be assumed that many Mexican parties can be found who had business
dealings with governmental entities which were not to their satisfaction; Mexico is unlikely to be different
from other countries in this respect. NAFTA was not intended to provide foreign investors with blanket
protection from this kind of disappointment, and nothing in its terms so provides.
84. It therefore would not be sufficient for the Claimants to convince the present Arbitral Tribunal that
the actions or motivations of the Naucalpan Ayuntamiento are to be disapproved, or that the reasons given
by the Mexican courts in their three judgements are unpersuasive. Such considerations are unavailing
unless the Claimants can point to a violation of an obligation established in Section A of Chapter Eleven
attributable to the Government of Mexico.
B. Grounds invoked by the Claimants
85. The Claimants have alleged violations of the following two provisions of NAFTA:
Article 1110(1)
“No party may directly or indirectly nationalize or expropriate an investment of an
investor of another Party in its territory or take a measure tantamount to nationalization or
expropriation of such investment (“expropriation”) except:
(a) for a public purpose;
(b) on a non-discriminatory basis;
(c) in accordance with due process of law and Article 1105(1); and
(d) on payment of compensation in accordance with paragraphs 2 through 6.”
Article 1105(1)
“Each Party shall accord to investments of investors of another Party treatment in
accordance with international law, including fair and equitable treatment and full
protection and security.”
86. Although the parties to the Concession Contract accepted the jurisdiction of the Mexican courts,
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the Claimants correctly point out that they did not exclude recourse to other courts or arbitral tribunals –
such as this one – having jurisdiction on another foundation. Nor is the fact that the Claimants took the
initiative before the Mexican courts fatal to the jurisdiction of the present Arbitral Tribunal. The Claimants
have cited a number of cases where international arbitral tribunals did not consider themselves bound by
decisions of national courts. Professor Dodge, in his oral argument, stressed the following sentence from
the well-known ICSID case of Amco v. Indonesia: “An international tribunal is not bound to follow the
result of a national court.” As the Claimants argue persuasively, it would be unfortunate if potential
claimants under NAFTA were dissuaded from seeking relief under domestic law from national courts,
because such actions might have the salutary effect of resolving the dispute without resorting to investorstate
arbitration under NAFTA. Nor finally has the Respondent argued that it cannot be held responsible for
the actions of a local governmental authority like the Ayuntamiento of Naucalpan.
87. The problem is that the Claimants’ fundamental complaint is that they are the victims of a breach
of the Concession Contract. NAFTA does not, however, allow investors to seek international arbitration for
mere contractual breaches. Indeed, NAFTA cannot possibly be read to create such a regime, which would
have elevated a multitude of ordinary transactions with public authorities into potential international
disputes. The Claimants simply could not prevail merely by persuading the Arbitral Tribunal that the
Ayuntamiento of Naucalpan breached the Concession Contract.
88. Understanding this proposition perfectly well, Professor Dodge insisted that the claims are not
simply for breach of contract, but involve “the direct expropriation of DESONA’s contractual rights” and
“the indirect expropriation of DESONA itself.” (English Transcript, 24.6.99, p. 23, l. 9-11.)
89. Professor Dodge then argued that a breach of contract constitutes an expropriation “if it is
confiscatory,” or, quoting Professor Brownlie, Principles of Public International Law, 5th edition at 550, if
“the state exercises its executive or legislative authority to destroy the contractual rights as an asset.”
Specifically, he invoked a “wealth of authority treating the repudiation of concession agreements as an
expropriation of contractual rights.”
90. Labelling is, however, no substitute for analysis. The words “confiscatory,” “destroy contractual
rights as an asset,” or “repudiation” may serve as a way to describe breaches which are to be treated as
extraordinary, and therefore as acts of expropriation, but they certainly do not indicate on what basis the
critical distinction between expropriation and an ordinary breach of contract is to be made. The
egregiousness of any breach is in the eye of the beholder – and that is not satisfactory for present purposes.
91. It is therefore necessary to examine whether the annulment of the Concession Contract may be
considered to be an act of expropriation violating NAFTA Article 1110. If not, the claim must fail. The
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question cannot be more central.
92. Before examining this crucial issue, it should be recalled that the Claimants originally grounded
their claim on an alleged violation of Article 1105 as well as one of Article 1110. While they have never
abandoned the ground of Article 1105, it figured very fleetingly in their later pleadings, and not at all in
Professor Dodge’s final arguments. This is hardly surprising. The only conceivably relevant substantive
principle of Article 1105 is that a NAFTA investor should not be dealt with in a manner that contravenes
international law. There has not been a claim of such a violation of international law other than the one
more specifically covered by Article 1110. In a feeble attempt to maintain Article 1105, the Claimants’
Reply Memorial affirms that the breach of the Concession Contract violated international law because it
was “motivated by noncommercial considerations, and compensatory damages were not paid.” This is but a
paraphrase of a complaint more specifically covered by Article 1110. For the avoidance of doubt, the
Arbitral Tribunal therefore holds that under the circumstances of this case if there was no violation of
Article 1110, there was none of Article 1105 either.
C. The contention that the annulment was an act of expropriation
93. The Respondent argues that the Concession Contract came to an end on two independently
justified grounds: invalidity and rescission.
94. The second is the more complex. It postulates that the Ayuntamiento was entitled to rescind the
Concession Contract due to DESONA’s failure of performance. If the Ayuntamiento was not so entitled, its
termination of the Concession Contract was itself a breach. Most of the evidence and debate in these
proceedings have focused on this issue: was DESONA in substantial non-compliance with the Concession
Contract? The subject is complicated by the fact that DESONA was apparently not given the benefit of the
30-day cure period defined in Article 31 of the Concession Contract.
95. The logical starting point is to examine the asserted original invalidity of the Concession Contract.
If this assertion was founded, there is no need to make findings with respect to performance; nor can there
be a question of curing original invalidity.
96. From this perspective, the problem may be put quite simply. The Ayuntamiento believed it had
grounds for holding the Concession Contract to be invalid under Mexican law governing public service
concessions. At DESONA’s initiative, these grounds were tested by three levels of Mexican courts, and in
each case were found to be extant. How can it be said that Mexico breached NAFTA when the
Ayuntamiento of Naucalpan purported to declare the invalidity of a Concession Contract which by its terms
was subject to Mexican law, and to the jurisdiction of the Mexican courts, and the courts of Mexico then
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agreed with the Ayuntamiento’s determination? Further, the Claimants have neither contended nor proved
that the Mexican legal standards for the annulment of concessions violate Mexico’s Chapter Eleven
obligations; nor that the Mexican law governing such annulments is expropriatory.
97. With the question thus framed, it becomes evident that for the Claimants to prevail it is not enough
that the Arbitral Tribunal disagree with the determination of the Ayuntamiento. A governmental authority
surely cannot be faulted for acting in a manner validated by its courts unless the courts themselves are
disavowed at the international level. As the Mexican courts found that the Ayuntamiento’s decision to
nullify the Concession Contract was consistent with the Mexican law governing the validity of public
service concessions, the question is whether the Mexican court decisions themselves breached Mexico’s
obligations under Chapter Eleven.
98. True enough, an international tribunal called upon to rule on a Government’s compliance with an
international treaty is not paralysed by the fact that the national courts have approved the relevant conduct
of public officials. As a former President of the International Court of Justice put it:
“The principles of the separation and independence of the judiciary in municipal law and
of respect for the finality of judicial decisions have exerted an important influence on the
form in which the general principle of State responsibility has been applied to acts or
omissions of judicial organs.
These basic tenets of judicial organization explain the reluctance to be found in some
arbitral awards of the last century to admit the extension to the judiciary of the rule that a
State is responsible for the acts of all its organs.
However, in the present century State responsibility for acts of judicial organs came to be
recognized. Although independent of the Government, the judiciary is not independent of
the State: the judgment given by a judicial authority emanates from an organ of the State
in just the same way as a law promulgated by the legislature or a decision taken by the
executive.
The responsibility of the State for acts of judicial authorities may result from three
different types of judicial decision.
The first is a decision of a municipal court clearly incompatible with a rule of
international law.
The second is what it known traditionally as a ‘denial of justice.’
The third occurs when, in certain exceptional and well-defined circumstances, a State is
responsible for a judicial decision contrary to municipal law.” Eduardo Jiménez de
Aréchaga, “International Law in the Past Third of a Century,” 159-1 Recueil des cours
(General Course in Public International law, The Hague, 1978). (Emphasis added.)
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99. The possibility of holding a State internationally liable for judicial decisions does not, however,
entitle a claimant to seek international review of the national court decisions as though the international
jurisdiction seised has plenary appellate jurisdiction. This is not true generally, and it is not true for
NAFTA. What must be shown is that the court decision itself constitutes a violation of the treaty. Even if
the Claimants were to convince this Arbitral Tribunal that the Mexican courts were wrong with respect to
the invalidity of the Concession Contract, this would not per se be conclusive as to a violation of NAFTA.
More is required; the Claimants must show either a denial of justice, or a pretence of form to achieve an
internationally unlawful end.
100. But the Claimants have raised no complaints against the Mexican courts; they do not allege a
denial of justice. Without exception, they have directed their many complaints against the Ayuntamiento of
Naucalpan. The Arbitral Tribunal finds that this circumstance is fatal to the claim, and makes it
unnecessary to consider issues relating to performance of the Concession Contract. For if there is no
complaint against a determination by a competent court that a contract governed by Mexican law was
invalid under Mexican law, there is by definition no contract to be expropriated.
101. The Arbitral Tribunal does not, however, wish to create the impression that the Claimants fail on
account of an improperly pleaded case. The Arbitral Tribunal thus deems it appropriate, ex abundante
cautela, to demonstrate that the Claimants were well advised not to seek to have the Mexican court
decisions characterised as violations of NAFTA.
102. A denial of justice could be pleaded if the relevant courts refuse to entertain a suit, if they subject
it to undue delay, or if they administer justice in a seriously inadequate way. There is no evidence, or even
argument, that any such defects can be ascribed to the Mexican proceedings in this case.
103. There is a fourth type of denial of justice, namely the clear and malicious misapplication of the
law. This type of wrong doubtless overlaps with the notion of “pretence of form” to mask a violation of
international law. In the present case, not only has no such wrong-doing been pleaded, but the Arbitral
Tribunal wishes to record that it views the evidence as sufficient to dispel any shadow over the bona fides
of the Mexican judgments. Their findings cannot possibly be said to have been arbitrary, let alone
malicious.
104. To reach this conclusion it is sufficient to recall the significant evidence of misrepresentation
brought before this Arbitral Tribunal. For this purpose, one need to do no more than to examine the twelfth
of the 27 irregularities, upheld by the Mexican courts as a cause of nullity: that the Ayuntamiento was
misled as to DESONA’s capacity to perform the concession.
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105. If the Claimants cannot convince the Arbitral Tribunal that the evidence for this finding was so
insubstantial, or so bereft of a basis in law, that the judgments were in effect arbitrary or malicious, they
simply cannot prevail. The Claimants have not even attempted to rebut the Respondent’s evidence on the
relevant standards for annulment of concessions under Mexican law. They did not challenge the
Respondent’s evidence that under Mexican law a public service concession issued by municipal authorities
based on error or misrepresentation is invalid. As for factual evidence, they have vigorously combated the
inferences made by the Ayuntamiento and the Mexican courts, but they have not denied that evidence
exists that the Ayunamiento was misled as to DESONA’s capacity to perform the concession.
106. At the presentation of the project to the Ayuntamiento in November 1992, where Mr Goldenstein
“of Global Waste” explained that his company would employ some 200 people and invest approximately
US$ 20 million, Mr Ted Guth of Sunlaw Energy – identified as a company to be associated in the creation
of DESONA – also appeared and articulated some “essential elements” of the project as follows:
“to enter into a power agreement with the electric company for 15 years and to build a
power plant that will use methane gas from the sanitary landfills of Rincon Verde and
Corral del Indio in Naucalpan, with an estimated generation of 210 megawatts, using biogas
and some natural gas.”
107. As indicated above (see paragraph 32), this prospect – apparently devoid of any feasibility study
worth the name – strikes the Arbitral Tribunal as unrealistic. This was the grandiose plan presented to the
Ayuntamiento, which was told at the same meeting that the city of Naucalpan would be given a carried
interest of 10% in DESONA “without having to invest one single cent and that after 15 years it would be
theirs.” One can well understand how members of the Ayuntamiento would be impressed by ostensibly
experienced professionals explaining how a costly headache could be transformed into a brilliant and
profitable operation.
108. The Claimants obviously cannot legitimately defend themselves by saying that the Ayuntamiento
should not have believed statements that were so unreasonably optimistic as to be fraudulent.
109. So when the moment came, one year later, for the Concession Contract to be signed, an absolutely
fundamental fact had changed: the Claimants had fallen out with Sunlaw Energy, who had disappeared
from the project, as best as the Arbitral Tribunal can determine, by October 1993.
110. For the Claimants to have gone ahead without alerting the Ayuntamiento to this factor was
unconscionable. The Arbitral Tribunal cannot believe that the matter was adequately covered by alleged
oral disclosures; Article 11 of the Concession Contract states flatly that “[t]he Concessionaire is obligated
to install an electricity generating plant which will utilize biogas out of Rincon Verde, Corral del Indio, or
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other.” (Claimants’ Translation, Claimants’ Memorial, Section 3, p. 22.)
111. It is more than a permissible inference that the original text of the Concession Contract had been
prepared on the basis, from the Claimants’ perspective, that they would be able to form an operating
consortium, that they had envisaged a programme dependent on the contributions of such third parties, and
that once the text had been approved by the legislature they did not wish to endanger what they had
achieved by disclosing that key partners had defected.
112. The testimony of Mr Ronald Proctor, although he was proffered by the Claimants, was
unfavourable to them. His written statement explains that during late October and early November 1993, he
attended meetings with Naucalpan officials, including the Mayor, during which he explained that his
company, BFI, was assisting DESONA and
“would commit the necessary start-up effort, capital and operational expertise to
DESONA in order to ensure the performance of the Concession Contract.”
113. There is no doubt about BFI’s capacity; it is a billion-dollar company with unquestioned
credibility in the industry. The point is rather that this testimony flatly contradicts an ostensible foundation
of the Concession Contract with DESONA. There is not a shred of written evidence that Mexican officials
were content to rely on DESONA because BFI was there, in effect, to do everything: start-up, funding, and
operations. Quite to the contrary, the contemporaneous written evidence relating to the period prior to
signature shows reliance on the representations of the Claimants as to their own capabilities. The
Concession Contract itself does not contemplate assignments, sub-contracts, or surrogates – let alone any
suggestion that DESONA could ensure performance of the Concession Contract only if it found an able
joint venture partner.
114. In a phrase, Mr Proctor’s testimony, perhaps unintentionally, supports the conclusion that the
Claimants’ main effort was focussed on getting the Concession Contract signed, after which they intended
to offer bits and pieces of valuable contract rights to more capable partners.
115. The Ayuntamiento was entitled to expect much more.
116. The Concession Contract says nothing about assignability. The Respondent has proffered evidence
of Mexican law to the effect that public service concessions are granted intuitu personae to a physical
person or legal entity on the basis of particular qualities. The Claimants have not contradicted this
evidence.
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117. The Claimants also sought to rely on an unsigned letter said to have been written by the previous
Mayor of Naucalpan in March 1994. The substance of the letter is in support of the Claimants, who of
course at that point in time were in imminent danger of losing DESONA’s concession. The Respondent
does not accept this document as genuine. But taking it as proffered by the Claimants, it is highly damaging
to their case in connection with the alleged misrepresentations, because it refers to the fact that the
DESONA
“stockholders are owners of a North American company that has 40 years of experience
in waste collection service. … These businessmen provide services in the City of Los
Angeles, Montebello, City of Industry and the City of Malibu.”
118. If this is what the Mayor who signed the Concession Contract still thought in March 1994, the
Claimants cannot seriously contend that, whatever they say might have been their earlier “puffery” in 1992
(to use Mr St. Louis’ hopeful euphemism), they had revealed all relevant elements of their modest
experience, and Global Waste’s short and woeful corporate history, by the time the Concession Contract
was signed in November 1993.
119. The only evidence the Claimants have to support their contention that they made adequate
disclosures before signature of the Concession Contract – as is clear from their post-hearing “Closing
Memorial” – is the self-serving oral assertion of Mr Goldenstein that he fully informed city officials in
various unrecorded conversations. This evidence is not consistent with the record. It is rejected.
120. To resume: the Claimants have not even attempted to demonstrate that the Mexican court
decisions constituted a fundamental departure from established principles of Mexican law. The
Respondent’s evidence as to the relevant legal standards for annulment of public service contracts stands
unrebutted. Nor do the Claimants contend that these legal standards breach NAFTA Article 1110. The
Arbitral Tribunal finds nothing in the application of these standards with respect to the issue of invalidity
that appears arbitrary or unsustainable in light of the evidentiary record. To the contrary, the evidence
positively supports the conclusions of the Mexican courts.
121. By way of a final observation, it must be said that the Claimants’ credibility suffered as a result of
a number of incidents that were revealed in the course of these arbitral proceedings, and which, although
neither the Ayuntamiento nor the Mexican courts would have been aware of them before this arbitration
commenced, reinforce the conclusion that the Ayuntamiento was led to sign the Concession Contract on
false pretences. It is hard to ignore the consistency with which the Claimants’ various partners or would-be
partners became disaffected with them. A Mexican businessman, Dr Palacios, appears to have contributed
US$ 225,000, as well as equipment, in the mistaken belief that he was making a capital contribution which
would lead to his becoming a DESONA shareholder. On 5 June 1994 he brought a criminal action for fraud
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against Mr Goldenstein, requesting that the police be requested to arrest him on sight. Mr Proctor of BFI,
although called as a witness by the Claimants, apparently recommended legal action against the Claimants
when he found out that the two vehicles purchased with the proceeds of a loan from BFI were sold by
DESONA without repaying the loan. Mr Bryan Stirrat, whose company worked as an independent
contractor on the Naucalpan landfill and to this day has an unsecured claim against DESONA in the
amount of US$ 765,000, excluding interest, stated on cross-examination that he had not been aware when
he went with Mr Goldenstein on 1 June 1994 to a meeting of the Ayuntamiento to seek reinstatement of the
Concession Contract that DESONA had sold all of its assets 10 days earlier; he affirmed that his company
had received nothing from the proceeds of that sale.
122. The list of demonstrably unreliable representations made before the Arbitral Tribunal is
unfortunately long. The arbitrators are reluctant to dwell on it in this Award, because they believe that the
Claimants’ counsel are competent and honourable professionals to whom a number of these revelations
came as a surprise. Nor is there any reason to embarrass Mr Davitian, who struck the Arbitral Tribunal as a
hard-working individual who may have been well out of his depth in an unfamiliar environment, not even
understanding what was being said on his behalf. The same is a fortiori true of Ms Baca, his divorced
spouse, who apparently had no role in the project at all.
123. The credibility gap lies squarely at the feet of Mr Goldenstein, who without the slightest inhibition
appeared to embrace the view that what one is allowed to say is only limited by what one can get away
with. Whether the issue was how non-U.S. nationals could de facto operate a Subchapter S corporation,
how the importer of vehicles might identify the ostensible seller and the ostensible price to the customs
authorities, or how a cheque made out to an official – as reimbursement of a luncheon – but endorsed back
to the payer might still be presented as evidence of payment under a lease, Mr Goldenstein seemed to
believe that such conduct is not only acceptable in business, but a sign of worldly competence.
124. The Arbitral Tribunal obviously disapproves of this attitude, and observes that it comforts the
conclusion that the annulment of the Concession Contract did not violate the Government of Mexico’s
obligations under NAFTA.
VII. COSTS
125. The claim has failed in its entirety. The Respondent has been put to considerable inconvenience.
In ordinary circumstances it is common in international arbitral proceedings that a losing claimant is
ordered to bear the costs of the arbitration, as well as to contribute to the prevailing respondent’s reasonable
costs of representation. This practice serves the dual function of reparation and dissuasion.
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126. In this case, however, four factors militate against an award of costs. First, this is a new and novel
mechanism for the resolution of international investment disputes. Although the Claimants have failed to
make their case under NAFTA, the Arbitral Tribunal accepts, by way of limitation, that the legal
constraints on such causes of action were unfamiliar. Secondly, the Claimants presented their case in an
efficient and professional manner. Thirdly, the Arbitral Tribunal considers that by raising issues of
defective performance (as opposed to voidness ab initio) without regard to the notice provisions of the
Concession Contract, the Naucalpan Ayuntamiento may be said to some extent to have invited litigation.
Fourthly, it appears that the persons most accountable for the Claimants’ wrongful behaviour would be the
least likely to be affected by an award of costs; Mr. Goldenstein is beyond this Arbitral Tribunal’s
jurisdiction, while Ms. Baca – who might as a practical matter be the most solvent of the Claimants – had
no active role at any stage.
127. Accordingly the Arbitral Tribunal makes no award of costs, with the result that each side bears its
own expenditures, and the amounts paid to ICSID are allocated equally.
VIII. DECISION
128. For the reasons stated above, and rejecting all contentions to the contrary, the Arbitral Tribunal
hereby decides in favour of the Respondent. Made as at Toronto, Canada, in English and Spanish, both
versions being equally authentic.
/ signed /
Mr Benjamin R. Civiletti
Date: [October 11, 1999]
/ signed /
Mr Claus von Wobeser
Date: [October 18, 1999]
/ signed /
Mr Jan Paulsson,
President
Date: [6 October 1999]
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Bluebook 20th ed.
Gerald Fitzmaurice, Hersch Lauterpacht - The Scholar as Judge - Part I, 37 Brit. Y.
B. Int'l L. 1 (1961).
APA 6th ed.
Fitzmaurice, G. (1961). Hersch Lauterpacht The Scholar as Judge Part I. British Year
Book of International Law, 37, 1-71.
ALWD
Fitzmaurice, G. (1961). Hersch Lauterpacht The Scholar as Judge Part I. British Year
Book of Intl L, 37, 1-71.
Chicago 7th ed.
Gerald Fitzmaurice, "Hersch Lauterpacht - The Scholar as Judge - Part I," British
Year Book of International Law 37 (1961): 1-71
McGill Guide 9th ed.
Gerald Fitzmaurice, "Hersch Lauterpacht - The Scholar as Judge - Part I" (1961) 37
Brit YB Inti L 1.
MLA 8th ed.
Fitzmaurice, Gerald. "Hersch Lauterpacht - The Scholar as Judge - Part I." British
Year Book of International Law, 37, 1961, p. 1-71. HeinOnline.
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ANNEX 166
REPORTS OF INTERNATIONAL
ARBITRAL AWARDS
RECUEIL DES SENTENCES
ARBITRALES
Claim of Finnish shipowners against Great Britain in respect of the use of
certain Finnish vessels during the war (Finland, Great Britain)
9 May 1934
VOLUME III pp. 1479-1550
NATIONS UNIES - UNITED NATIONS
Copyright (c) 2006
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ANNEX 170
INTER-AMERICAN COURT OF HUMAN RIGHTS
ADVISORY OPINION OC-9/87
OF OCTOBRER 6, 1987
JUDICIAL GUARANTEES IN STATES OF EMERGENCY
(ARTS. 27(2), 25 AND 8
AMERICAN CONVENTION ON HUMAN RIGHTS)
REQUESTED BY THE GOVERNMENT OF URUGUAY
Present:
Rafael Nieto-Navia, President
Héctor Gros Espiell, Vice President
Rodolfo E. Piza E., Judge
Thomas Buergenthal, Judge
Pedro Nikken, Judge
Héctor Fix-Zamudio, Judge
Also present:
Charles Moyer, Secretary
Manuel Ventura, Deputy Secretary
THE COURT,
composed as above,
gives the following Advisory Opinion:
1. By note of September 17, 1986, the Government of Uruguay (hereinafter "the
Government") submitted to the Inter-American Court of Human Rights (hereinafter
"the Court") an advisory opinion request on the scope of the prohibition of the
suspension of the judicial guarantees essential for the protection of the rights
mentioned in Article 27(2) of the American Convention on Human Rights (hereinafter
"the Convention” or "the American Convention").
2. The Government asked the Court "to interpret the scope of the Convention's
prohibition of the suspension of ‘the judicial guarantees essential for the protection
of such rights.’ Because even ‘in time of war, public danger, or other emergency that
threatens the independence or security of a State Party’ (Art. 27(1)) it is not possible
to suspend ‘the judicial guarantees essential for the protection of such rights,’ the
Government of Uruguay requests the Court's opinion, in particular, regarding: (a)
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which of these judicial guarantees are ‘essential’ and (b) the relationship between
Article 27(2), in that regard, and Articles 25 and 8 of the American Convention. "
3. By note of October 29, 1986, acting pursuant to Article 52 of the Rules of
Procedure of the Court (hereinafter "the Rules"), the Secretariat requested written
observations on the issues involved in the instant proceedings from the Member
States of the Organization of American States (hereinafter "the OAS") as well as,
through the Secretary General, from the organs listed in Chapter X of the Charter of
the OAS.
4. By telex of April 1, 1987, the President asked the Government, pursuant to
Article 49(2)(a) of the Rules, to present any additional considerations or reasons that
it took into account in deciding to request the advisory opinion. The Government
responded by telex of April 24, 1987, in which it expressed the following:
Under normal circumstances in democratic systems of law in which
human rights are respected and regulated, the judicial protection
afforded by internal norms is generally recognized in practice.
This is not the case in those systems or situations in which the
violation of fundamental rights is not only of a substantive nature but
also affects the judicial guarantees which have developed alongside
them.
As recognized by the Inter-American Commission and by the Inter-
American Court of Human Rights in its Advisory Opinion OC-8, of
January 30, 1987, the political history of Latin America shows that it is
during states of exception or of emergency that the failure of these
judicial guarantees is most serious insofar as the protection of the
rights that cannot be suspended even in such situations.
5. On that same date, the Government appointed Dr. Didier Opertti, Director of
the Legal Adviser's Office of the Ministry of Foreign Affairs, as its Agent.
6. The President of the Court directed that the written submissions and other
relevant documents be filed with the Secretariat before January 26, 1987. He later
extended this deadline to June 8, 1987.
7. The Governments of Bolivia and Panama replied to the communication from
the Secretariat.
8. The International Human Rights Law Group, the International Commission of
Jurists, the Lawyers Committee for Human Rights and Amnesty International, all
non-governmental organizations, submitted amicus curiae briefs.
9. The Court set a public hearing for June 18, 1987 for the purpose of enabling
the Member States and OAS organs to present to the Court their arguments on the
issues raised in the request for an advisory opinion. It continued the hearing at the
Government's request made by telex of June 12, 1987.
10. By telex of September 22, 1987, the Government made the following
clarifications regarding the continuance of the hearing originally set for June 18,
1987, and the telex of the President of the Court, dated June 16, 1987:
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1. The scope of the request by the Government of Uruguay refers,
specifically, to the interpretation of the expression "essential" judicial
guarantees found in Article 27 (2) of the American Convention on
Human Rights, as related to Articles 25 and 8 of the Convention.
2. In the opinion of the Government of Uruguay, the definition of
the scope of that expression for the purposes of international law and
in particular of the American Convention is without prejudice to that of
the legal system of the State requesting the opinion and its condition
as a democratic State.
11. That telex does not modify the terms of the request as they were originally
presented. Paragraph one reiterates the questions posed and the second paragraph
merely reserves the point of view of the Government.
I
PROCEDURE
12. The Court continued the public hearing set for June 18, 1987, at the
Government's request. Since the Government has already informed the Court by
telex of the clarifications it deemed necessary, the Court finds that setting another
hearing would serve no purpose and that it should take up consideration of the
request for an advisory opinion without further delay.
II
ADMISSIBILITY
13. The Government has submitted this request under the authority of Article
64(1) of the Convention. Uruguay is a Member State of the OAS and,therefore, has
the right to submit requests for advisory opinions to the Court.
14. The second question posed by the Government refers specifically to the
interpretation of norms of the Convention, being the relationship among Articles
27(2), 25 and 8 Therefore, the request falls within the subject matter suitable for an
advisory opinion, that is, "the interpretation of this Convention or of other treaties
concerning the protection of human rights in the American states." (Art. 64(1)).
15. The Court finds, therefore, that the request meets the requirements of
admissibility.
16. The terms of the request and the considerations which, according to the
Government, prompted the request, show that the matter submitted to the Court is
a juridical question which does not refer, specifically or concretely, to any particular
fact situation. The Court recognizes that these circumstances could, in certain cases,
lead it to make use of the discretionary powers implied in its advisory jurisdiction
and to abstain from responding to a request formulated in those terms ("Other
treaties" Subject to the Advisory Jurisdiction of the Court (Art. 64 American
Convention on Human Rights), Advisory Opinion OC-1/82 of September 24, 1982.
Series A No. 1, para. 30 and Habeas Corpus in Emergency Situations (Arts.
27(2), 25(1) and 7(6) American Convention on Human Rights), Advisory
Opinion OC-8/87 of January 30, 1987. Series A No. 8, para. 10). As the Court has
said, the advisory jurisdiction of the Court is "an alternative judicial method"
(Restrictions to the Death Penalty (Arts. 4(2) and 4(4) American
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Convention on Human Rights), Advisory Opinion OC-3/83 of September 8, 1983.
Series A No. 3, para. 43) for the protection of internationally recognized human
rights, which shows that this jurisdiction should not, in principle, be used for purely
academic speculation, without a foreseeable application to concrete situations
justifying the need for an advisory opinion.
17. Nevertheless, the question raised in the request of the Government is related
to a specific juridical, historical and political context, in that states of exception or
emergency, and of human rights and the essential judicial guarantees in those
moments, is a critical problem in the Americas. From that perspective, the Court
understands that its opinion could be useful within a reality in which the basic
principles of the system have often been questioned. Therefore, it sees no reason to
refrain from rendering an opinion. Thus, the Court admits the request.
III
THE MERITS
18. The Government's request refers to Article 27 of the Convention which reads
as follows:
Article 27. Suspension of Guarantees
1. In time of war, public danger, or other emergency that
threatens the independence or security of a State Party, it may take
measures derogating from its obligations under the present
Convention to the extent and for the period of time strictly required by
the exigencies of the situation, provided that such measures are not
inconsistent with its other obligations under international law and do
not involve discrimination on the ground of race, color, sex, language,
religion, or social origin.
2. The foregoing provision does not authorize any suspension of
the following articles: Article 3 (Right to Juridical Personality), Article 4
(Right to Life), Article 5 (Right to Humane Treatment), Article 6
(Freedom from Slavery), Article 9 (Freedom from Ex Post Facto
laws), Article 12 (Freedom of Conscience and Religion), Article 17
(Rights of the Family), Article 18 (Right to a Name), Article 19 (Rights
of the Child), Article 20 (Right to Nationality), and Article 23 (Right to
Participate in Government), or of the judicial guarantees essential for
the protection of such rights.
3. Any State Party availing itself of the right of suspension shall
immediately inform the other States Parties, through the Secretary
General of the Organization of American States, of the provisions the
application of which it has suspended, the reasons that gave rise to
the suspension, and the date set for the termination of such
suspension.
19. The Government makes the following request:
3. The Government of Uruguay asks the Court to interpret the
scope of the Convention's prohibition of the suspension of "the judicial
guarantees essential for the protection of such rights."
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Because even "in time of war, public danger, or other emergency that
threatens the independence or security of a State Party" (Art. 27(1)) it
is not possible to suspend "the judicial guarantees essential for the
protection of such rights," the Government of Uruguay requests the
Court's opinion, in particular, regarding: (a) which of these judicial
guarantees are "essential", and (b) the relationship between Article 27
(2), in that regard, with Articles 25 and 8 of the American Convention.
20. The Court shall first examine what are, according to the Convention, the
"essential" judicial guarantees alluded to in Article 27(2). In this regard, the Court
has previously defined in general terms that such guarantees are understood to be
"those that ordinarily will effectively guarantee the full exercise of the rights and
freedoms protected by that provision and whose denial or restriction would endanger
their full enjoyment" (Habeas Corpus in Emergency Situations, supra 16, para.
29). Likewise, it has emphasized that the judicial nature of those guarantees implies
"the active involvement of an independent and impartial judicial body having the
power to pass on the lawfulness of measures adopted in a state of emergency"
(Ibid., para. 30).
21. From Article 27(1), moreover, comes the general requirement that in any
state of emergency there be appropriate means to control the measures taken, so
that they are proportionate to the needs and do not exceed the strict limits imposed
by the Convention or derived from it.
22. The Convention provides other criteria for determining the basic
characteristics of judicial guarantees. The starting point of the analysis must be the
obligation of every State Party to "respect the rights and freedoms recognized (in the
Convention) and to ensure to all persons subject to their jurisdiction the free and full
exercise of those rights and freedoms" (Art. 1(1)). From that general obligation is
derived the right of every person, set out in Article 25(1), "to simple and prompt
recourse, or any other effective recourse, to a competent court or tribunal for
protection against acts that violate his fundamental rights recognized by the
constitution or laws of the state concerned or by this Convention."
23. As the Court has already pointed out, Article 25(1) of the Convention is a
general provision that gives expression to the procedural institution known as
amparo, which is a simple and prompt remedy designed for the protection of all the
fundamental rights (Habeas Corpus in Emergency Situations, supra 16, para.
32). This article also establishes in broad terms the obligation of the States to
provide to all persons within their jurisdiction an effective judicial remedy to
violations of their fundamental rights. It provides, moreover, for the application of
the guarantee recognized therein not only to the rights contained in the Convention,
but also to those recoqnized by the Constitution or laws. It follows, a fortiori, that
the judicial protection provided by Article 25 of the Convention applies to the rights
not subject to derogation in a state of emergency.
24. Article 25(1) incorporates the principle recognized in the international law of
human rights of the effectiveness of the procedural instruments or means designed
to guarantee such rights. As the Court has already pointed out, according to the
Convention:
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... States Parties have an obligation to provide effective judicial
remedies to victims of human rights violations (Art. 25), remedies that
must be substantiated in accordance with the rules of due process of
law (Art. 8 (1)), all in keeping with the general obligation of such
States to guarantee the free and full exercise of the rights recognized
by the Convention to all persons subject to their jurisdictions (Art. 1)
(Velásquez Rodríguez, Fairen Garbi and Solís Corrales and
Godínez Cruz Cases, Preliminary Objections, Judgments of June
26, 1987, paras. 90, 90 and 92, respectively).
According to this principle, the absence of an effective remedy to violations of the
rights recognized by the Convention is itself a violation of the Convention by the
State Party in which the remedy is lacking. In that sense, it should be emphasized
that, for such a remedy to exist, it is not sufficient that it be provided for by the
Constitution or by law or that it be formally recognized, but rather it must be truly
effective in establishing whether there has been a violation of human rights and in
providing redress. A remedy which proves illusory because of the general conditions
prevailing in the country, or even in the particular circumstances of a given case,
cannot be considered effective. That could be the case, for example, when practice
has shown its ineffectiveness: when the Judicial Power lacks the necessary
independence to render impartial decisions or the means to carry out its judgments;
or in any other situation that constitutes a denial of justice, as when there is an
unjustified delay in the decision; or when, for any reason, the alleged victim is
denied access to a judicial remedy.
25. In normal circumstances, the above conclusions are generally valid with
respect to all the rights recognized by the Convention. But it must also be
understood that the declaration of a state of emergency --whatever its breadth or
denomination in internal law-- cannot entail the suppression or ineffectiveness of the
judicial guarantees that the Convention requires the States Parties to establish for
the protection of the rights not subject to derogation or suspension by the state of
emergency.
26. Therefore, any provision adopted by virtue of a state of emergency which
results in the suspension of those guarantees is a violation of the Convention.
27. Article 8(1) of the Convention points out that
Every person has the right to a hearing, with due guarantees and
within a reasonable time, by a competent, independent, and impartial
tribunal, previously established by law, in the substantiation of any
accusation of a criminal nature made against him or for the
determination of his rights and obligations of a civil, labor, fiscal, or
any other nature.
In the Spanish text of the Convention, the title of this provision, whose interpretation
has been specifically requested, is "Judicial Guarantees."* This title may lead to
confusion because the provision does not recognize any judicial guarantees, strictly
speaking. Article 8 does not contain a specific judicial remedy, but rather the
procedural requirements that should be observed in order to be able to speak of
effective and appropriate judicial guarantees under the Convention.
* "Right to a Fair Trial" in the English text.
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28. Article 8 recognizes the concept of "due process of law", which includes the
prerequisites necessary to ensure the adequate protection of those persons whose
rights or obligations are pending judicial determination. This conclusion is justifiable
in that Article 46(2)(a) uses the same expression in establishing that the duty to
pursue and exhaust the remedies under domestic law is not applicable when
the domestic legislation of the state concerned does not afford due
process of law for the protection of the right or rights that have
allegedly been violated.
29. The concept of due process of law expressed in Article 8 of the Convention
should be understood as applicable, in the main, to all the judicial guarantees
referred to in the American Convention, even during a suspension governed by
Article 27 of the Convention.
30. Reading Article 8 together with Articles 7(6), 25 and 27(2) of the Convention
leads to the conclusion that the principles of due process of law cannot be suspended
in states of exception insofar as they are necessary conditions for the procedural
institutions regulated by the Convention to be considered judicial guarantees. This
result is even more clear with respect to habeas corpus and amparo, which are
indispensable for the protection of the human rights that are not subject to
derogation and to which the Court will now refer.
31. Paragraph 6 of Article 7 (Right to Personal Liberty) recognizes and governs
the remedy of habeas corpus. In another opinion, the Court has carefully studied
habeas corpus as a guarantee not subject to derogation. It said in that regard:
(H)abeas corpus performs a vital role in ensuring that a person's life
and physical integrity are respected, in preventing his disappearance
or the keeping of his whereabouts secret and in protecting him against
torture or other cruel, inhumane, or degrading punishment or
treatment (Habeas Corpus in Emergency Situations, supra 16,
para. 35).
32. Regarding amparo, contained in Article 25(1) of the Convention, the Court
asserted the following in the advisory opinion just mentioned above:
The above text (Art. 25(1)) is a general provision that gives
expression to the procedural institution known as "amparo," which is a
simple and prompt remedy designed for the protection of all of the
rights recognized by the constitutions and laws of the States Parties
and by the Convention. Since " amparo " can be applied to all rights, it
is clear that it can also be applied to those that are expressly
mentioned in Article 27(2) as rights that are non-derogable in
emergency situations (Ibid., para. 32).
33. Referring to these two judicial guarantees essential for the protection of the
non-derogable rights, the Court held that
the writs of habeas corpus and of "amparo" are among those judicial
remedies that are essential for the protection of various rights whose
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derogation is prohibited by Article 27(2) and that serve, moreover, to
preserve legality in a democratic society (Ibid., para. 42).
34. The Court adds that, moreover, there are other guarantees based upon
Article 29(c) of the Convention, which reads as follows:
Article 29. Restrictions Regarding
Interpretation
No provision of this Convention shall be interpreted as:
...
c) precluding other rights or guarantees that are inherent in the
human personality or derived from representative democracy as a
form of government.
35. The Court has already referred to the rule of law, to representative
democracy, and to personal liberty, and has described in detail how essential they
are to the inter-American system and in particular to the system for the protection of
human rights contained in the Convention (see Compulsory Membership in an
Association Prescribed by Law for the Practice of Journalism (Arts. 13 and
29 American Convention on Human Rights), Advisory Opinion OC-5/85 of
November 13, 1985. Series A No. 5, para. 66; The Word " Laws " in Article 30 of
the American Convention on Human Rights, Advisory Opinion OC-6/86 of May 9,
1986. Series A No. 6, paras. 30 and 34 and Habeas Corpus in States of
Emergency, supra 16, para. 20). The Court considers it relevant to reiterate the
following:
In a democratic society, the rights and freedoms inherent in the
human person, the guarantees applicable to them and the rule of law
form a triad. Each component thereof defines itself, complements and
depends on the others for its meaning (Habeas Corpus in
Emergency Situations, supra 16, para. 26).
When guarantees are suspended, some legal restraints applicable to
the acts of public authorities may differ from those in effect under
normal conditions. These restraints may not be considered to be nonexistent,
however, nor can the government be deemed thereby to
have acquired absolute powers that go beyond the circumstances
justifying the grant of such exceptional legal measures. The Court has
already noted, in this connection, that there exists an inseparable
bond between the principle of legality, democratic institutions and the
rule of law (Ibid., para. 24; see also The Word " Laws ", supra,
para. 32).
36. The Court also said that the suspension of guarantees must not exceed that
strictly required and that
any action on the part of the public authorities that goes beyond those
limits, which must be specified with precision in the decree
promulgating the state of emergency, would also be unlawful...
(Habeas Corpus in Emergency Situations, supra 16, para. 38).
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(I)t follows that the specific measures applicable to the rights or
freedoms that have been suspended may also not violate these
general principles. Such violation would occur, for example, if the
measures taken infringed the legal regime of the state of emergency,
if they lasted longer than the time limit specified, if theywere
manifestly irrational, unnecessary or disproportionate, or if, in
adopting them, there was a misuse or abuse of power (Ibid., para.
39).
37. Thus understood, the "guarantees... derived from representative democracy
as a form of government" referred to in Article 29(c) imply not only a particular
political system against which it is unlawful to rebel (Ibid., para. 20), but the need
that it be supported by the judicial guarantees essential to ensure the legality of the
measures taken in a state of emergency, in order to preserve the rule of law (Ibid.,
para. 40).
38. The Court holds that the judicial guarantees essential for the protection of the
human rights not subject to derogation, according to Article 27(2) of the Convention,
are those to which the Convention expressly refers in Articles 7(6) and 25(1),
considered within the framework and the principles of Article 8, and also those
necessary to the preservation of the rule of law, even during the state of exception
that results from the suspension of guarantees.
39. When in a state of emergency the Government has not suspended some
rights and freedoms subject to derogation, the judicial guarantees essential for the
effectiveness of such rights and liberties must he preserved.
40. It is neither possible nor advisable to try to list all the possible "essential"
judicial guarantees that cannot be suspended under Article 27(2). Those will depend
in each case upon an analysis of the juridical order and practice of each State Party,
which rights are involved, and the facts which give rise to the question. For the same
reasons, the Court has not considered the implications of other international
instruments (Art. 27(1)) that could be applicable in concrete cases.
41. Therefore,
THE COURT IS OF THE OPINION
Unanimously,
1. That the "essential" judicial guarantees which are not subject to derogation,
according to Article 27(2) of the Convention, include habeas corpus (Art. 7(6)),
amparo, and any other effective remedy before judges or competent tribunals (Art.
25(1)), which is designed to guarantee the respect of the rights and freedoms whose
suspension is not authorized by the Convention.
Unanimously,
2. That the "essential" judicial guarantees which are not subject to suspension,
include those judicial procedures, inherent to representative democracy as a form of
government (Art. 29(c)), provided for in the laws of the States Parties as suitable for
guaranteeing the full exercise of the rights referred to in Article 27(2) of the
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Convention and whose suppression or restriction entails the lack of protection of
such rights.
Unanimously,
3. That the above judicial guarantees should be exercised within the framework
and the principles of due process of law, expressed in Article 8 of the Convention.
Done in Spanish and in English, the Spanish text being authentic, at the seat of the
Court in San José, Costa Rica, this sixth day of October, 1987.
Rafael Nieto-Navia
President
Héctor Gros Espiell Rodolfo E. Piza E.
Thomas Buergenthal Pedro Nikken
Héctor Fix-Zamudio
Charles Moyer
Secretary
___________________
Judge Jorge R. Hernández Alcerro participated in the discussion and preliminary vote
of this Advisory Opinion. He was not present, however, when it was signed.
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ANNEX 171
Page 1
International Centre for Settlement of
Investment Disputes
______________________________________________________________
DUKE ENERGY ELECTROQUIL PARTNERS
&
ELECTROQUIL S.A.
(“Duke”)
CLAIMANTS
v.
REPUBLIC OF ECUADOR
(“Ecuador”)
RESPONDENT
ICSID Case No. ARB/04/19
______________________________________________________________
AWARD
______________________________________________________________
Rendered by an Arbitral Tribunal composed of:
Prof. Gabrielle Kaufmann-Kohler, President
Dr. Enrique Gómez Pinzón, Arbitrator
Prof. Albert Jan van den Berg, Arbitrator
Secretary of the Tribunal:
Mr. Gonzalo Flores
Date of Dispatch to the Parties: August 18, 2008
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TABLE OF CONTENTS
TABLE OF ABBREVIATIONS......................................................................................................... 5
I. FACTS..............................................................................................................................6
1. The parties.....................................................................................................................6
1.1 The Claimants........................................................................................................6
1.2 The Respondent ....................................................................................................6
2. Factual background......................................................................................................7
2.1 The energy crisis in Ecuador .................................................................................7
2.2 The subscription of the PPAs and other related agreements ................................8
2.3 The payments under the PPAs and the constitution of the Payment Trusts........11
2.4 The fines imposed during the execution of the PPAs ..........................................12
2.5 Duke Energy’s indirect involvement in the PPAs through its investment in
Electroquil ............................................................................................................14
2.6 Ecuador’s direct involvement in the PPAs ...........................................................14
2.7 The Med-Arb Agreements ...................................................................................15
2.8 The liquidation of the PPAs and related agreements ..........................................16
2.9 The proceedings relating to customs duties exemptions.....................................17
II. PROCEDURAL HISTORY...................................................................................................19
1. Initial phase .................................................................................................................19
2. Pre-hearing written phase..........................................................................................20
3. Hearing.........................................................................................................................21
4. Post-hearing written phase........................................................................................22
III. PARTIES’ POSITIONS.......................................................................................................23
1. Parties’ positions on jurisdiction ..............................................................................23
1.1 Ecuador’s objections to jurisdiction......................................................................23
1.2 Duke’s response to Ecuador’s objections to jurisdiction......................................24
2. Parties’ positions on the merits.................................................................................24
2.1 Duke’s position ....................................................................................................24
2.1.1 Duke’s arguments..................................................................................24
2.1.2 Duke’s prayers for relief .........................................................................25
2.2 Ecuador’s position on the merits..........................................................................26
2.2.1 Ecuador’s arguments.............................................................................26
2.2.2 Ecuador’s prayers for relief ....................................................................26
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IV. ANALYSIS.......................................................................................................................27
1. Preliminary observations ...........................................................................................27
2. Jurisdiction..................................................................................................................28
2.1 Tribunal’s jurisdiction under the Arbitration Agreement .......................................29
2.1.1 The scope of the Arbitration Agreement ................................................30
a) Definition of the issue ...................................................................30
b) Parties’ positions ..........................................................................31
c) Tribunal’s determination ...............................................................31
2.1.2 ICSID jurisdictional requirements...........................................................36
2.2 Alternative jurisdiction under the BIT ...................................................................37
2.2.1 Parties’ positions....................................................................................37
2.2.2 Tribunal’s determination.........................................................................38
a) The late invocation of the BIT.......................................................39
b) Combined jurisdictional bases......................................................39
c) The implementation of the Payment Trusts and the scope of
the BIT ..........................................................................................41
d) Customs duties and the scope of the BIT on matters of
taxation .........................................................................................42
3. Applicable law.............................................................................................................46
3.1 Parties’ positions..................................................................................................47
3.2 Tribunal’s determination ......................................................................................47
3.2.1 Applicable law........................................................................................47
3.2.2 Application ratione personae/temporis of the BIT ..................................48
4. Merits ...........................................................................................................................49
4.1 Did Ecuador breach the PPAs and Ecuadorian law? ..........................................50
4.1.1 Claims for violation of the payment obligations......................................50
a) Parties’ positions ..........................................................................50
b) Tribunal’s determination ...............................................................52
4.1.2 Claims for interest on late payments......................................................59
a) Is interest due? .............................................................................60
b) Alleged “waiver” to claim interest..................................................64
4.1.3 Fines and penalties imposed during the execution of the PPAs............66
a) Parties’ positions ..........................................................................66
b) Contractual regime .......................................................................67
c) Tribunal’s review of the fines ........................................................69
4.1.4 The Med-Arb Agreements and the local arbitration ...............................82
a) Parties’ positions ..........................................................................82
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b) Tribunal’s determination ...............................................................82
4.1.5 Did Ecuador fail to act in good faith? .....................................................85
a) Parties’ positions ..........................................................................85
b) Tribunal’s determination ...............................................................86
4.2 Did Ecuador violate the BIT? ...............................................................................86
4.2.1 Issues to be determined.........................................................................86
4.2.2 Did Ecuador violate the duty to observe obligations entered into with
respect to the investment (Art. II(3)(c) of the BIT)?................................87
a) Parties’ positions ..........................................................................87
b) Tribunal’s determination ...............................................................88
4.2.3 Did Ecuador violate the duty of fair and equitable treatment (Art.
II(3)(a) of the BIT)? ................................................................................90
a) Parties’ positions ..........................................................................90
b) Applicable standard ......................................................................91
c) Tribunal’s determination ...............................................................95
4.2.4 Did Ecuador violate the duty not to impair the investment by
arbitrary conduct (Art. II(3)(b) of the BIT)?...........................................100
a) Parties’ positions ........................................................................100
b) Applicable standard ....................................................................101
c) Tribunal’s determination .............................................................103
4.2.5 Did Ecuador violate the duty to provide effective means of asserting
claims (Article II(7) of the BIT)? ...........................................................103
a) Parties’ positions ........................................................................103
b) Tribunal’s determination .............................................................105
4.3 Damages ...........................................................................................................109
4.3.1 Parties’ positions..................................................................................109
a) Claimants’ position .....................................................................109
b) Respondent’s position ................................................................114
4.3.2 The Tribunal’s analysis ........................................................................118
a) Applicable law.............................................................................118
b) Consequences of the violation of the PPAs and Ecuadorian
law ..............................................................................................118
c) Consequences of the violations of the BIT standards ................123
d) Currency of the Award................................................................126
e) Beneficiary of the Award.............................................................127
4.4 Costs..................................................................................................................127
V. RELIEF..........................................................................................................................128
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TABLE OF ABBREVIATIONS
Arbitration Rules ICSID Rules of Procedure for Arbitration Proceedings
BIT Bilateral investment treaty; specifically “Agreement Between the United
States of America and the Republic of Ecuador Concerning the Reciprocal
Promotion and Protection of Investments" of 27 August 1993
Cl. Exh. Claimants’ Exhibit [Documentary evidence & legal materials]
Cl. 1st PHB / 2nd PHB Claimants’ First Post-Hearing Brief of 30 June 2006 / Second Post-Hearing
Brief of 21 July 2006
Cl. Mem. Claimants’ Memorial in Chief of 2 September 2005
Cl. Rejoinder Claimants’ Rejoinder on Jurisdiction of 31 March 2006
Cl. Reply Claimants’ Reply Memorial and Counter-Memorial on Jurisdiction of 18
January 2006
ER Expert Report
Exh. C- Claimants’ Exhibit [Request for Arbitration]
ICSID International Centre for Settlement of Investment Disputes
ICSID Convention Convention on the Settlement of Investment Disputes between States and
Nationals of other States
MEM Ministry of Energy and Mines
PPAs Power Purchase Agreements (PPA 95 and PPA 96)
R. 1st PHB / 2nd PHB Respondent’s First Post-Hearing Brief of 30 June 2006 / Second Post-
Hearing Brief of 21 July 2006
R. Answer Respondent’s Answer to the Memorial in Chief of 22 November 2005
(“Memorial de Contestación a la Demanda”)
R. Exh. Respondent’s Exhibit [Documentary evidence & legal materials]
R. Reply Respondent’s Reply on Jurisdiction and Rejoinder on the merits of 6 March
2006
RforA Request for Arbitration
Tr. Transcript of the Hearing of 24-28 April 2006
WS Witness Statement
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It was not involved in the making of the award of March 2002. The local
arbitration was conducted under the auspices of the Guayaquil Chamber of
Commerce, a private entity which has no connection with the State.
Relying on Waste Management, the Respondent submits that a defense raised in
local proceedings cannot amount to a denial of justice.
In any event, the local arbitral tribunal observed the standards of due process.
The award of 20 September 2001 was only a preliminary decision and the
Claimants could have sought the annulment of the award of March 2002, a
remedy existing under Ecuadorian law, of which the Claimants chose not to make
use. The Claimants thus failed to exhaust local remedies and cannot allege any
denial of justice. In any event, the dispute is now submitted to this Tribunal by
consent of both parties, which rules out a denial of justice.
389. With respect to the customs duties claim, the Respondent contends that any alleged
delay in the local proceedings was due to Electroquil, whose counsel did not appear at
the hearing set on 29 January 2005. It further explains that the Ecuadorian Supreme
Court was reinstated on 30 November 2005 and that a delay between April and
November 2005 cannot amount to a denial of justice.
b) Tribunal’s determination
390. Article II(7) of the BIT reads as follows:
Each Party shall provide effective means of asserting claims and enforcing
rights with respect to investment, investment agreements, and investment
authorizations.
391. Such provision guarantees the access to the courts and the existence of institutional
mechanisms for the protection of investments. As such, it seeks to implement and form
part of the more general guarantee against denial of justice.
392. As a preliminary comment, the Tribunal notes that the existence and availability of the
Ecuadorian judicial system and of recourse to arbitration under the Mediation and
Arbitration Law are not at issue here. What is at issue and must be reviewed by the
Tribunal is how these mechanisms performed, as well as the alleged failure of the
State to respect its promise to arbitrate.
393. The Tribunal will examine these issues with respect to the local arbitration, which was
between the MEM and Electroquil (and not Duke Energy as the Claimants seem to
suggest in their Reply, ¶ 212). It will not entertain the same issues in connection with
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the tax claims as it has determined that it has no jurisdiction over tax matters.
Admittedly, one might argue that the present claim deals with access to courts primarily
and with taxation only secondarily and that it is therefore covered by the BIT. The
Tribunal is disinclined to follow this avenue. It is of the opinion that jurisdiction should
not be accepted unless the related intent of the Contracting States can be clearly
proven, which is not the case here.
394. It appears not to be seriously disputed, and rightly so, that the acts of the local arbitral
tribunal and of the local arbitral institution cannot be attributed to Ecuador. These are
private actors whose conduct does not engage the responsibility of the State. The
Tribunal will thus focus its inquiry on the behavior of the MEM and of the Attorney-
General. In this respect, it notes that it has not been established that the Government
exercised pressure on the local arbitrators to reverse the decisions on jurisdiction. It is
true that the sequence of events in the local arbitration is puzzling. After having
dismissed the Attorney-General's objection to jurisdiction in two decisions on 3 August
2001 and upon reconsideration again on 20 September 2001, the local arbitral tribunal
issued a final award denying jurisdiction six months later on 11 March 2002. The
evidence given by the president of the tribunal in the present arbitration failed to
convince the Tribunal of the merits of such a course of action. This said, the Tribunal
does not find that there are sufficient elements on record to conclude that undue
influence was exerted.
395. Turning now to the behavior of the MEM and the Attorney-General, the Claimants’
argument that the State had participated in the mediation without raising an objection
as to the validity of the Med-Arb Agreements does not appear relevant in the present
context. Indeed, the rule which is generally accepted in comparative law pursuant to
which a defense of lack of jurisdiction must be raised in limine litis does not apply to
pre-arbitral stages.
396. The Claimants argue that it is widely accepted under international law that a State
which refuses to respect its promise to arbitrate with a foreign party commits a denial of
justice. Doing so, it fails to recognize that Ecuador’s promise related to a domestic
arbitration with a local company. The arbitration had its seat in the country, was
governed by the local arbitration law, and conducted under local institutional rules. The
alleged ground for nullity arose under the law governing the arbitration. This situation
differs from that in which a State agrees to international arbitration with a foreign party
and then raises a defense of lack of jurisdiction arising from an incapacity under its own
law while the arbitration agreement is valid under the law governing the arbitration.
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397. By contrast, the Respondent asserts that the mere fact that a State raises a defense of
lack of jurisdiction in a proceeding does not amount to a denial of justice. It relies on
Waste Management II. As aptly summarized by Paulsson: “The City [of Acapulco] was
clearly entitled to raise jurisdictional objections without being deemed to commit an
international delict. Even if the objection had been absurd, the delict would have arisen
only if the Mexican legal system had upheld it”47. The question therefore is whether the
Ecuadorian legal system has upheld the Attorney-General’s objection.
398. The short answer is that Electroquil did not challenge the final award of 11 March 2002
issued by the local arbitral tribunal before the courts of Ecuador and that, as a
consequence, the Ecuadorian legal system never came into play to rule on the award
of the local tribunal.
399. The Claimants contend that their claim for denial of justice is founded even though they
did not challenge the local award because the requirement to exhaust local remedies
does not apply when a State reneges on its promise to arbitrate and when no effective
and adequate remedies existed in any event. Citing Paulsson, they state that the
“victim of a denial of justice is not required to pursue improbable remedies” (Cl. Reply,
¶ 217). By contrast, the Respondent insists on the exhaustion of local remedies and
contends that Article 31 of the Ecuadorian Mediation and Arbitration Law contains
remedies in the event of excess of power or violation of due process.
400. The Claimants are right to point out that there is no obligation to pursue “improbable”
remedies. Article 31 of the Mediation and Arbitration Law provides for an action for
annulment of arbitral awards on several grounds48. The Respondent contends that this
47 See Jan Paulsson, Denial of Justice in International Law, Cambridge, 2006, p.153-154.
48 NULIDAD DE LOS LAUDOS
Art. 31.- Cualquiera de las partes podrá intentar la acción de nulidad de un laudo arbitral,
cuando:
a) No se haya citado legalmente con la demanda y el juicio se ha seguido y terminado
en rebeldía. Será preciso que la falta de citación haya impedido que el demandado
deduzca sus excepciones o haga valer sus derechos y, además, que el demandado
reclame por tal omisión al tiempo de intervenir en la controversia; o,
b) No se haya notificado a una de las partes con las providencias del tribunal y este
hecho impida o limite el derecho de defensa de la parte; o,
c) Cuando no se hubiere convocado, no se hubiere notificado la convocatoria, o luego
de convocada no se hubiere practicado las pruebas, a pesar de la existencia de hecho
que deban justificarse; o,
d) El laudo se refiera a cuestiones no sometidas al arbitraje o conceda más allá de lo
reclamado.
and in English translation provided by the Claimants with notes in brackets by the
Tribunal.
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108
provision permits challenges on the ground that a tribunal exceeded its powers by
declining jurisdiction (R. Reply, ¶ 247). On the face of the text, none of the grounds
expressly address jurisdiction. They appear to deal with instances of breach of due
process (a-c) and of excess of powers (d). The decision of the Superior Court of Quito,
which the Respondent cites in support of its contention, also deals with an excess of
power, the tribunal having ruled on a claim not before it, a situation different from the
one at issue.
401. In other words, it is established that an award may be annulled on grounds such as
excess of power and breach of due process. It is unclear from the record, however,
whether Ecuadorian courts would assimilate an erroneous decision dismissing
jurisdiction to an excess of power, as would be for instance the case under Art. 52(1)(b)
of the ICSID Convention. Yet, lack of clarity it is not sufficient to demonstrate that a
remedy is futile. In other words, the Claimants have not established to the satisfaction
of the Tribunal that it was improbable that the Ecuadorian courts would have made
such an assimilation.
402. On this basis, the Tribunal concludes that the Claimants have failed to show that no
adequate and effective remedies existed.
403. For all these different reasons, the Tribunal concludes that Ecuador has not breached
Article II(7) of the Treaty.
NULLITY OF AWARDS
Article 31. Either of the parties may file a nullity appeal against the arbitration award in the
following cases:
a) When a party was not notified of the arbitration request as provided by law, and the
arbitration was carried out and concluded in default of appearance; and the lack of
notification prevented the respondent from submitting exceptions or enforcing his rights.
The respondent must request time to participate in the controversy due to such omission;
or
b) If either of the parties were not notified of the court’s decisions, and this fact prevented
or restricted the party’s right to defense; or [recte: the procedural actions taken by the
tribunal]
c) When the hearing was not announced or notification of the announcement was not
made or, after notification, evidence was not submitted in spite of the need for justification
of events; or
d) The award refers to questions not submitted to arbitration or goes beyond the
arbitration request. [recte: what is claimed or the request for relief] (Exh. C 71)
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ANNEX 175
Date of dispatch to the Parties: June 26, 2003
International Centre for Settlement of Investment Disputes
Washington, D.C.
In the proceeding between
The Loewen Group, Inc. and Raymond L. Loewen
(Claimants)
and
United States of America
(Respondent)
Case No. ARB(AF)/98/3
Award
Members of the Tribunal
Sir Anthony Mason
Judge Abner J. Mikva
Lord Mustill
Secretary of the Tribunal
Mrs Margrete Stevens
Representing the First Claimant
Mr Christopher F. Dugan (until March 10,
2003)
Mr James A. Wilderotter
Mr Gregory A. Castanias
Jones, Day, Reavis & Pogue
Representing the Second Claimant
Mr John H. Lewis, Jr.
Montgomery, McCracken, Walker &
Rhoads
D. Geoffrey Cowper, QC
Fasken Martineau DuMoulin (from October
11, 2001)
Representing the Respondent
Mr Kenneth L. Doroshow (until July 8,
2002)
Mr Jonathan B. New (from July 8,
2002)
United States Department of Justice
Mr Mark A. Clodfelter
Mr Barton Legum
United States Department of State
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2
I. INTRODUCTION
1. This is an important and extremely difficult case. Ultimately it turns on a question of
jurisdiction arising from (a) the NAFTA requirement of diversity of nationality as
between a claimant and the respondent government, and (b) the assignment by the
Loewen Group, Inc. of its NAFTA claims to a Canadian corporation owned and
controlled by a United States corporation. This question was raised by Respondent's
motion to dismiss for lack of jurisdiction filed after the oral hearing on the merits. In
this Award we uphold the motion and dismiss Claimants’ NAFTA claims.
2. As our consideration of the merits of the case was well advanced when Respondent
filed this motion to dismiss and as we reached the conclusion that Claimants’ NAFTA
claims should be dismissed on the merits, we include in this Award our reasons for
this conclusion. As will appear, the conclusion rests on the Claimants’ failure to
show that Loewen had no reasonably available and adequate remedy under United
States municipal law in respect of the matters of which it complains, being matters
alleged to be violations of NAFTA.
3. This dispute arises out of litigation brought against first Claimant, the Loewen Group,
Inc (“TLGI”) and the Loewen Group International, Inc (“LGII”) (collectively called
“Loewen”), its principal United States subsidiary, in Mississippi State Court by
Jeremiah O’Keefe Sr. (Jerry O’Keefe), his son and various companies owned by the
O’Keefe family (collectively called “O’Keefe”). The litigation arose out of a
commercial dispute between O’Keefe and Loewen which were competitors in the
funeral home and funeral insurance business in Mississippi. The dispute concerned
three contracts between O’Keefe and Loewen said to be valued by O’Keefe at
$980,000 and an exchange of two O’Keefe funeral homes said to be worth $2.5
million for a Loewen insurance company worth $4 million approximately. The action
was heard by Judge Graves (an African-American judge) and a jury. Of the twelve
jurors, eight were African-American.
4. The Mississippi jury awarded O’Keefe $500 million damages, including $75 million
damages for emotional distress and $400 million punitive damages. The verdict was
the outcome of a seven-week trial in which, according to Claimants, the trial judge
Annex 175
3
repeatedly allowed O’Keefe’s attorneys to make extensive irrelevant and highly
prejudicial references (i) to Claimants’ foreign nationality (which was contrasted to
O’Keefe’s Mississippi roots); (ii) race-based distinctions between O’Keefe and
Loewen; and (iii) class-based distinctions between Loewen (which O’Keefe counsel
portrayed as large wealthy corporations) and O’Keefe (who was portrayed as running
family-owned businesses). Further, according to Claimants, after permitting those
references, the trial judge refused to give an instruction to the jury stating clearly that
nationality-based, racial and class-based discrimination was impermissible.
5. Loewen sought to appeal the $500 million verdict and judgment but were confronted
with the application of an appellate bond requirement. Mississippi law requires an
appeal bond for 125% of the judgment as a condition of staying execution on the
judgment, but allows the bond to be reduced or dispensed with for “good cause”.
6. Despite Claimants’ claim that there was good cause to reduce the appeal bond, both
the trial court and the Mississippi Supreme Court refused to reduce the appeal bond at
all and required Loewen to post a $625 million bond within seven days in order to
pursue its appeal without facing immediate execution of the judgment. According to
Claimants, that decision effectively foreclosed Loewen’s appeal rights.
7. Claimants allege that Loewen was then forced to settle the case “under extreme
duress”. Other alternatives to settlement were said to be catastrophic and/or
unavailable. On January 29, 1996, with execution against their Mississippi assets
scheduled to start the next day, Loewen entered into a settlement with O’Keefe under
which they agreed to pay $175 million.
8. In this claim Claimants seek compensation for damage inflicted upon TLGI and LGII
and for damage to second Claimant’s interests as a direct result of alleged violations
of Chapter Eleven of the North American Free Trade Agreement (“NAFTA”)
committed primarily by the State of Mississippi in the course of the litigation.
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II. THE PARTIES
9. First Claimant TLGI is a Canadian corporation which carries on business in Canada
and the United States. Second Claimant is Raymond Loewen, a Canadian citizen who
was the founder of TLGI and its principal shareholder and chief executive officer.
TLGI submits claims as "investor of a Party" on its own behalf under NAFTA, Article
1116 and on behalf of LGII under Article 1117. Likewise, Raymond Loewen submits
claims as “the investor of a party” on behalf of TLGI under NAFTA, Article 1117.
10. The Respondent is the Federal Government of the United States of America.
III. HISTORY OF PROCEEDINGS IN THIS ARBITRATION
11. There is no occasion to set out the procedural history of this arbitration before the
Tribunal delivered its Decision dated January 5, 2001, on Respondent’s objection to
competence and jurisdiction. The Decision fully recites that history. It will, however,
be necessary to refer later to the grounds of that objection because they were not fully
determined by the Decision. The Decision is attached to this Award.
12. By that Decision dated January 5, 2001, the Tribunal dismissed Respondent’s
objection to competence and jurisdiction so far as it related to the first ground of
objection1 and adjourned the further hearing of Respondent’s other grounds of
objection and joined that further hearing to the hearing on the merits which was fixed
for October 15, 2001. The Tribunal made orders –
1. Respondent to file its counter-memorial on the merits within 60 days
of the date of this Decision.
2. Claimants to file their replies within 60 days of the time limited for the
filing of Respondent’s counter-memorial on the merits.
3. Respondent to file its rejoinder within 60 days of the time limited for
the filing of Claimants’ replies.
1 Sir Robert Jennings in his Third Opinion misstates the Tribunal’s Decision when he says that the
Tribunal rejected Respondent’s argument that the decisions of the Mississippi courts were not
“measures’ because they were not “final’ acts of the United States court system.
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IV. REPRESENTATION
13. First Claimant has been represented by –
Mr Christopher F. Dugan Jones, Day, Reavis & Pogue (until March 10, 2003)
Mr James A. Wilderotter Jones, Day, Reavis & Pogue
Mr Gregory A. Castanias Jones, Day, Reavis & Pogue
Second Claimant has been represented by –
Mr John H. Lewis, Jr. Montgomery, McCracken, Walker & Rhoads
D. Geoffrey Cowper, QC Fasken Martineau DuMoulin (from October 11, 2001)
14. Respondent has been represented by –
Mr Kenneth L. Doroshow United States Department of Justice (until July 8, 2002)
Mr Jonathan B. New United States Department of Justice (from July 8, 2002)
Mr Mark A. Clodfelter United States Department of State
Mr Barton Legum United States Department of State
15. On October 10, 2001, the Government of Canada and the Government of Mexico
gave written notice of their intention to attend the hearing on the merits.
16. Canada has been represented by –
Mr Fulvio Fracassi Department of Foreign Affairs and International Trade
Ottawa, Canada
Ms Sheila Mann Department of Foreign Affairs and International Trade
Ottawa, Canada
17. Mexico has been represented by –
Mr Hugo Perezcano Díaz Secretaría de Comercio y Fomento Industrial
(SECOFI), Mexico City, Mexico
V. HISTORY OF THE PROCEEDINGS SINCE THE DECISION ON
COMPETENCE AND JURISDICTION
18. Respondent’s Counter-Memorial was filed on March 30, 2001, pursuant to an
extension of time granted on January 31, 2001.
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19. Claimants’ Joint Reply was filed on June 8, 2001, pursuant to an extension of time
granted on May 15, 2001.
20. Respondent’s Rejoinder was filed on August 27, 2001, pursuant to an extension of
time granted on August 17, 2001.
21. On August 9, 2001, Respondent filed a motion for the disqualification of Yves
Fortier, QC as a member of the Tribunal in circumstances arising out of the proposed
merger of Mr Fortier’s firm with a firm which had previously acted for Claimants in
connection with their bankruptcy reorganisation under Chapter Eleven of the United
States Bankruptcy Code.
22. On September 10, 2001, Mr Fortier resigned from his office as a member of the
Tribunal.
23. On September 13, 2001, Sir Anthony Mason and Judge Mikva, pursuant to Article
15(3) of the ICSID Arbitration (Additional Facility) Rules consented to Mr Fortier’s
resignation.
24. On September 14, 2001, Lord Mustill was duly appointed by Claimants as a member
of the Tribunal in place of Mr Fortier.
25. The oral hearing on the merits, incorporating the joined unresolved objections to
competence and jurisdiction, took place in Washington DC on October 15, 16, 17, 18
and 19, 2001.
26. At the conclusion of the oral hearing, the Tribunal made orders granting leave to
Canada and Mexico to file written submissions pursuant to NAFTA Article 1128 and
to the Parties to file written submissions in reply.
27. On November 9, 2001, Canada and Mexico filed written submissions.
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28. On December 7, 2001, Claimants filed a joint reply and Respondent filed a response
to the written submissions of Canada and Mexico.
29. Subsequently, on January 25, 2002 Respondent filed the motion to dismiss Claimants'
NAFTA claims for lack of jurisdiction, based on the reorganization of TLGI under
Chapter Eleven of the United States Bankruptcy Code. An element in that
reorganization was the assignment by TLGI of its NAFTA claims to a newly created
Canadian corporation, Nafcanco, which was owned and controlled by LGII (re-named
"Alderwoods, Inc", a United States corporation).
VI. THE CIRCUMSTANCES GIVING RISE TO CLAIMANTS’ CLAIM
30. The dispute which gave rise to the litigation in Mississippi State Court related to three
contracts between O’Keefe and the Loewen companies and a settlement agreement
made on August 19, 1991 whereby Loewen agreed to sell an insurance company and
a related trust fund to O’Keefe and to provide O’Keefe with the exclusive right to
provide certain insurance policies sold through Loewen funeral homes. By the
settlement agreement, for its part O’Keefe agreed to dismiss an action it had brought
against Loewen relating to the three contracts, to sell to Loewen two O’Keefe funeral
homes, and to assign to Loewen an option which O’Keefe held on a cemetery tract
north of Jackson, Mississippi.
31. The origin of the dispute lay in competition between two funeral companies in the
Gulf Coast region of Mississippi. In the Gulfport area, the Riemann brothers owned
and operated funeral homes and funeral insurance companies. In the Biloxi area,
O’Keefe owned and operated funeral homes and funeral insurance companies. Gulf
National Life Insurance Company (“Gulf”) was one such funeral insurance company
owned and operated by O’Keefe.
32. Loewen, which had embarked on a grand strategy of acquiring funeral homes across
North America, purchased the Riemann businesses in January, 1990. The Riemann
businesses were restructured into a holding company known as “Riemann Holdings,
Inc.”, of which LGII became owner as to 90%, the Riemann interests holding the
remaining 10%. Loewen retained the previous owners and managers as salaried
Annex 175
8
employees of Loewen. Despite the change in ownership, Riemann continued to
advertise itself as locally owned – “we haven’t sold out: we just have a new partner,
The Loewen Group International”. O’Keefe challenged Riemann’s claim that it was
locally owned. O’Keefe published advertisements in the Gulf Coast community,
asserting that Riemann was really owned by Loewen which was a Canadian company
financed by an Asian Bank. This was part of an advertising campaign designed to
encourage support for the O’Keefe local business as against foreign-owned and
foreign financed competition.
33. Loewen extended its Mississippi interests to Jackson, the largest metropolitan area in
the State, by purchasing the Wright & Ferguson Funeral Home, the largest funeral
home in Jackson. Wright & Ferguson had an association with O’Keefe dating back to
1974, when O’Keefe purchased the exclusive right to sell Gulf funeral insurance
through the Wright & Ferguson Funeral Home.
34. Loewen began to sell insurance through Wright & Ferguson Funeral Homes, despite
Gulf’s exclusive right under the 1974 contract. O’Keefe’s complaints about this
breach of the contract, along with financial difficulties that O’Keefe was
experiencing, led to negotiations between O’Keefe and Loewen which failed to result
in any agreement. Subsequently O’Keefe began a lawsuit in connection with the
breach of contract.
35. It was then that the settlement agreement of August 19, 1991 was reached. The
agreement provided for completion within 120 days, time being of the essence.
Prompt completion was important to O’Keefe because O’Keefe was under review by
the state regulatory authority. There was evidence that Loewen was aware of
O’Keefe’s difficulties with the regulatory authority and of the adverse consequences
for O’Keefe if the agreement were not completed in the 120 days. Moreover, the
Riemanns objected strongly to the agreement, so much so that Loewen told them that
the deal would not close without their approval.
36. There was a dispute over the 1991 agreement and its legal effect. While the parties
were negotiating about that agreement the US Federal Bureau of Investigation seized
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9
the Mississippi Insurance Commissioner’s records relating to the O’Keefe insurance
companies.
37. After the negotiations broke down, O’Keefe filed an amended complaint alleging
breach of the 1991 agreement and fresh claims of common law fraud and violations of
Mississippi anti-trust law. That complaint sought actual damages of $5 million.
38. In May 1992, the Mississippi Insurance Commissioner placed Gulf under
administrative supervision. O’Keefe’s complaint was further amended to include
claims for consequential damages allegedly suffered as a result of administrative
supervision.
VII. THE NATURE OF CLAIMANT’S CLAIM
39. Claimants’ case is that the verdict for $500,000,000 and the decisions refusing to
relax the bonding requirements are “measures adopted or maintained by a Party”
relating to:
(a) investors of another Party;
(b) within the meaning of NAFTA, Article 1101.1.
Claimants argue that
(1) the trial court, by admitting extensive anti-Canadian and pro-American
testimony and prejudicial counsel comment, violated Article 1102 of
NAFTA which bars discrimination against foreign investors and their
investments;
(2) the discrimination tainted the inexplicably large verdict;
(3) the trial court, by the way in which it conducted the trial, in particular by its
conduct of the voir dire and its irregular reformation of the initial jury
verdict for $260,000,000, by permitting extensive nationality-based, racial
and class-based testimony and counsel comments, violated Article 1105 of
NAFTA which imposes a minimum standard of treatment for investments of
foreign investors, including a duty of “full protection and security” and a
right to “fair and equitable treatment” of foreign investors;
(4) the excessive verdict and judgment (even apart from the discrimination)
violated Article 1105;
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(5) the Mississippi courts’ arbitrary application of the bonding requirement
violated Article 1105; and
(6) the discriminatory conduct, the excessive verdict, the denial of Loewen’s
right to appeal and the coerced settlement violated Article 1110 of NAFTA,
which bars the uncompensated appropriation of investments of foreign
investors.
40. Claimants allege that Respondent is liable for Mississippi’s NAFTA breaches under
Article 105, which requires that the Parties to NAFTA shall ensure that all necessary
measures are taken to give effect to the provisions of the Agreement, including their
observance by State and provincial governments. Claimants also allege that, by
tolerating the misconduct which occurred during the O’Keefe litigation, Respondent
directly breached Article 1105, which imposes affirmative duties on Respondent to
provide “full protection and security” to investments of foreign investors, including
“full protection and security” against third-party misconduct.
VIII. THE GROUNDS OF RESPONDENT’S OBJECTION TO COMPETENCE AND
JURISDICTION
41. By its Memorial on Competence and Jurisdiction, Respondent objected to the
competence and jurisdiction of this Tribunal on the following grounds:
(1) the claim is not arbitrable because the judgments of domestic courts in
purely private disputes are not “measures adopted or maintained by a Party”
within the scope of NAFTA Chapter Eleven;
(2) the Mississippi court judgments complained of are not “measures adopted or
maintained by a Party” and cannot give rise to a breach of Chapter Eleven as
a matter of law because they were not final acts of the United States judicial
system;
(3) a private agreement to settle a litigation matter out of court is not a
government “measure” within the scope of NAFTA Chapter Eleven;
(4) the Mississippi trial court’s alleged failure to protect against the alien-based,
racial and class-based references cannot be a “measure” because Loewen
never objected to such references during the trial; and
(5) Raymond Loewen’s Article 1117 claims should be dismissed because he
does not “own or control” the enterprise at issue.
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IX. THE ISSUES
42. In stating the issues and in dealing with them, we have addressed the sectional and
particular arguments presented by counsel. Without in any way criticizing the
presentation of the arguments in that form, we emphasise that those particular
arguments are designed to elucidate the one substantial question, namely whether the
judgment and orders made by the Mississippi Courts against Loewen amounted to
violations of NAFTA for which Respondent is liable.
43. Respondent maintains grounds (2) to (4) inclusive of its grounds of objection to
competence and jurisdiction. As Respondent’s substantive submissions on the merits
cover much of the subject matter dealt with by the unresolved grounds of objection,
we shall direct our attention in the first instance to the substantive issues.
(a) Issues concerning the Trial
44. Issues of fact and issues of law arise in connection with the trial of the action in
Mississippi State Court before Judge Graves and a jury. According to Claimants, the
trial resulted in a grossly excessive verdict, brought about by conduct of O’Keefe’s
counsel, notably Mr Gary, which was allowed by the trial judge. Claimants contend
that the conduct of the trial, for which Respondent is responsible under NAFTA,
involved violations of NAFTA Articles 1102, 1105 and 1110. Respondent, on the
other hand, contends that Claimants’ complaints about the trial are grossly
exaggerated and that they do not constitute NAFTA violations. Respondent relies
upon grounds (2), (3) and (4) of its objection to competence and jurisdiction as
substantive defences to the claim. Respondent argues also that Claimants are not
entitled to rely on the conduct constituting the alleged NAFTA violations because
they did not object to that conduct at the trial. Respondent further contends that
flawed decisions taken at trial by Loewen, not NAFTA violations, were the cause of
the verdict.
45. The issues of fact which arise for determination, in the light of the cases presented by
the Parties, may be expressed as follows:
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(1) Did the trial court allow O’Keefe to engage in a strategy of exciting anti-
Canadian, pro-Mississippi animus?
(2) Did the trial court allow O’Keefe to engage in a strategy of racial
antagonism?
(3) Did the trial court allow O’Keefe to engage in class-based
animus?
(4) Does the conduct of the trial court give rise to an inference of bias against
Loewen?
(5) Was the trial flawed by other major irregularities of a kind that could result
in manifest injustice?
(6) What steps, if any, did Loewen take at the trial to object to conduct of the
kind described in (1), (2) and (3) above, or to protect themselves from it?
46. (1) The next question is whether the conduct of which Claimants, if established,
complain tainted the verdict and whether that conduct contributed to an
excessive verdict. These questions calls for consideration of the decisions
taken at the trial by Loewen and for an examination of the amounts awarded
for
(a) punitive damages;
(b) economic damages;
(c) emotional damages.
(2) A separate question is whether there was any legal or evidentiary basis for
O’Keefe’s antitrust and oppression claims.
47. Ultimately, so far as the conduct of the trial is concerned, the following questions of
law arise for determination:
(1) Was the conduct of the trial so flawed as to violate NAFTA Articles 1102,
1105 and 1110 or any of them, assuming the verdict and judgment of
Mississippi State Court to be a “measure adopted or maintained by a Party
within the scope of NAFTA Chapter Eleven”?
(2) Did Claimants’ failure to object at the trial to conduct constituting NAFTA
violations disentitle Claimants from relying upon them?
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(b) Issues concerning the supersedeas bonding requirement
48. Other issues concern the supersedeas bonding requirement and the refusal of the
Mississippi courts to relax the requirement. Claimants make no challenge to the
bonding requirement itself. Claimants argue that the refusals to relax the bonding
requirement constituted independent violations of NAFTA provisions. Claimants also
argue that the refusal to relax the bonding requirement effectively deprived Loewen
of the prospect of appealing the verdict entered by the trial court. In this respect
Claimants assert that the deprivation of the prospect of appeal satisfied the principle
of finality, if such a principle is applicable to a claim under NAFTA based on the
decision of a trial court. Claimants also contend that the decisions not to relax the
bonding requirement in a situation in which Loewen was exposed to immediate
execution on its assets subjected Loewen to economic duress. The claim of economic
duress, if soundly based, would lead to a challenge to set aside the settlement
agreement under which Loewen agreed to pay to O’Keefe $175 million. Yet there is
no suggestion that Loewen seeks to rescind or set aside that agreement. The claim of
economic duress may, however, be relevant in establishing that entry into the
agreement was consequential upon violation of one or more of the NAFTA articles.
49. The issues of fact in relation to the decisions of the Mississippi courts refusing
relaxation of the bonding requirement and Loewen’s entry into the settlement
agreement are:
(1) Were the refusals to relax the bonding requirement the result of an
institutional or other bias on the part of the Mississippi judiciary against
Loewen by virtue of Loewen’s nationality?
(2) Did the refusals to relax the bonding requirement effectively foreclose the
options otherwise available to Loewen to challenge by way of appeal or
otherwise the verdict entered by the trial court?
(3) Was Loewen’s decision to enter into the settlement agreement a business
judgment or decision on the part of Loewen?
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50. The principal questions of law which arise in consequence of the refusals to relax the
bonding requirement and the entry into the settlement agreement are:
(1) Did the refusals constitute a violation of the NAFTA articles on its own or in
combination with the jury’s verdict?
(2) Did the refusals satisfy the principle of finality, thereby enabling Claimants
to hold Respondent responsible for NAFTA violations at the trial?
(3) If entry into the settlement agreement was the result of a business decision
by Loewen, does that preclude Claimants from relying on NAFTA
violations?
51. The claim before the Tribunal is a claim under international law for violations of
NAFTA. It is for the Tribunal to decide the issues in dispute in accordance with
NAFTA and applicable rules of international law. NAFTA Article 1131.1. The
Tribunal is concerned with domestic law only to the extent that it throws light on the
issues in dispute and provides domestic avenues of redress for matters of which
Claimants complain. The Tribunal cannot under the guise of a NAFTA claim
entertain what is in substance an appeal from a domestic judgment.
52. The claim before the Tribunal relates to the conduct of the Mississippi trial court and
the Mississippi Supreme Court for whose acts, if they constitute a violation of
NAFTA, Respondent is responsible (NAFTA Article 105). Respondent is not
responsible under NAFTA for the conduct of O’Keefe and its counsel in the
Mississippi litigation, unless responsibility for that conduct can be attributed to the
Mississippi courts.
53. As will appear hereafter, Judge Graves failed in his duty to take control of the trial by
permitting the jury to be exposed to persistent and flagrant appeals to prejudice on the
part of O’Keefe’s counsel and witnesses. Respondent is responsible for any failure on
the part of the trial judge in failing to take control of the trial so as to ensure that it
was fairly conducted in this respect.
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X. THE TRIAL
54. Having read the transcript and having considered the submissions of the parties with
respect to the conduct of the trial, we have reached the firm conclusion that the
conduct of the trial by the trial judge was so flawed that it constituted a miscarriage of
justice amounting to a manifest injustice as that expression is understood in
international law. Whether this conclusion results in a violation of Article 1105
depends upon the resolution of Respondent’s submissions still to be considered, in
particular the submission that State responsibility arises only when final action is
taken by the State’s judicial system as a whole.
55. In the succeeding paragraphs we set out the reasons for the conclusion stated in para.
54 above as well as the reasons why we conclude that, in other respects, Claimants’
case must be rejected.
(a) O’Keefe’s nationality strategy
56. O’Keefe’s case at trial was conducted from beginning to end on the basis that Jerry
O’Keefe, a war hero and “fighter for his country”, who epitomised local business
interests, was the victim of a ruthless foreign (Canadian) corporate predator. There
were many references on the part of O’Keefe’s counsel and witnesses to the Canadian
nationality of Loewen (“Ray Loewen and his group from Canada”). Likewise,
O’Keefe witnesses said that Loewen was financed by Asian money, these statements
being based on the fact that Loewen was partly financed by the Hong Kong and
Shanghai Bank, an English and Hong Kong bank which was erroneously described by
Jerry O’Keefe in evidence as the “Shanghai Bank”. Indeed, Jerry O’Keefe,
endeavouring to justify an earlier advertising campaign in which O’Keefe had
depicted its business under American and Mississippi flags and Loewen under
Canadian and Japanese flags, stated that the Japanese may well control both the
“Shanghai Bank” and Loewen but he did not know that. O’Keefe’s strategy of
presenting the case in this way was linked to Jerry O’Keefe’s fighting for his country
against the Japanese and the exhortation in the closing address of Mr Gary (lead
counsel for O’Keefe) to the jury to do their duty as Americans and Mississippians.
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This strategy was calculated to appeal to the jury’s sympathy for local home-town
interests as against the wealthy and powerful foreign competitor.
57. Several additional examples will serve to illustrate this strategy. In the voir dire and
opening statements, Mr Gary stated that he had “teamed up” with Mississippi lawyers
“to represent one of your own, Jerry O’Keefe and his family”. Mr Gary also stated
“The Loewen Group, Ray Loewen, Ray Loewen is not here to-day. The Loewen
Group is from Canada. He’s not here to-day. Do you think that every person should
be responsible and should step up to the plate and face their own actions? Let me see
a show of hands if you feel that everybody in America should have the responsibility
to do that”. Whilst the conduct of the voir dire may not in itself have been
conspicuously out of line with practice in Mississippi State courts, the skilful use by
counsel for Claimants of the opportunity to implant inflammatory and prejudicial
materials in the minds of the jury set the tone for the trial when it actually began.
58. In the voir dire O’Keefe’s counsel sought an assurance from potential jurors that they
would be willing to award heavy damages. Once again, in their opening statements,
O’Keefe’s counsel urged the jury to exercise “the power of the people of Mississippi”
to award massive damages. O’Keefe’s counsel drew a contrast between O’Keefe’s
Mississippi antecedents and Loewen’s “descent on the State of Mississippi”.
59. Emphasis was constantly given to the Mississippi antecedents and connections of
O’Keefe’s witnesses. By way of contrast Mr Gary, in cross-examination of Raymond
Loewen, repeatedly referred to his Canadian nationality, noted that he had not “spent
time” in Mississippi and questioned him about foreign and local funeral home
ownership. Jerry O’Keefe, in his evidence, pointed out that Loewen was a foreign
corporation, its “payroll checks come out of Canada” and “their invoices are printed
in Canada”.
60. An extreme example of appeals to anti-Canadian prejudice was evidence given by Mr
Espy, former United States Secretary of State for Agriculture who, called to give
evidence of the good character of Jerry O’Keefe, spoke of his (Espy’s) experience in
protecting “the American market” from Canadian wheat farmers who exported low
priced wheat into the American market with which American producers could not
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17
compete and later, having secured a market, then jacked up the price. The tactic of
thrusting prejudicial comment on to the cross-examiner was not confined to Mr Espy.
It was a feature of Jerry O’Keefe’s answers in cross-examination.
61. The strategy of emphasizing O’Keefe’s American nationality as against Loewen’s
Canadian origins reached a peak in Mr Gary’s closing address. He likened Jerry
O’Keefe’s struggle against Loewen with his war-time exploits against the Japanese,
asserting that he was motivated by “pride in America” and “love for your country”.
By way of contrast, Mr Gary characterized Loewen’s case as “Excuse me, I’m from
Canada”. Indeed, Mr Gary commenced his closing address by emphasizing
nationalism:
“[Y]our service on this case is higher than any honor that a citizen of this
country can have, short of going to war and dying for your country.”
(Transcript at 5539).
He described the American jury system as one that O’Keefe
“fought for and some died for” (Transcript at 5540-41).
Mr Gary said
“they [Loewen] didn’t know that this man didn’t come home just as an ace
who fought for his country – he’s a fighter … He’ll stand up for America
and he has” (Transcript at 5544).
62. Mr Gary returned to the same theme at the end of his closing address:
“ [O’Keefe] fought and some died for the laws of this nation, and they’re
[Loewen] going to put him down for being American” (Transcript at
5588).
Mr Gary reminded the jury that many of O’Keefe’s witnesses were Mississippians
(Transcript at 5576,5578, 5589, 5591). On the other hand, Mr Gary characterized
Loewen as a foreign invader who “came to town like gang busters. Ray came
sweeping through …” (Transcript at 5548). Mr Gary even repeated the prejudicial
evidence given by Mr Espy about the Canadian wheat farmers. Mr Gary likened
Loewen to the Canadian wheat farmers. Loewen would “come in” and purchase a
funeral home and “no sooner than they got it, they jacked up the prices down here in
Mississippi” (Transcript at 5588). Mr Gary continued on a similar theme when he
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urged the jury to award substantial damages in doing their duty as Americans and
Mississippians.
63. Respondent argues that the vast majority of references to nationality during the trial
were made in a context in which O’Keefe was seeking to identify the location of
disputed events. This argument is without substance. The references to nationality
were an element in a strategy calculated to appeal to the jury’s sentiment in favour of
local interests. In conformity with this strategy, O’Keefe’s counsel went out of their
way to make it clear that they had no quarrel with Mr John Wright and David
Riemann who were Mississippians, notwithstanding that Wright and Ferguson was a
defendant in the action, Mr Wright was a director of LGII and the Riemanns held
10% of the share capital of the Riemann companies.
64. Respondent also argues that the introduction of evidence with an anti-Canadian basis
was caused by Loewen’s plan to portray O’Keefe as “a biased and unfair competitor
who had engaged in an anti-foreigner advertising campaign” with a view to taking
business away from Riemann Holdings. Respondent is correct in saying that Loewen
pursued that plan. It misfired. The jury appears not to have been concerned by
O’Keefe’s advertising campaign. But the answer to Respondent’s argument is that
O’Keefe’s counsel in the voir dire and in their opening statement had already
embarked on their nationality strategy before Loewen’s counsel made any reference
to the advertising campaign in their opening statements. In any event, the persistent
pursuit by O’Keefe of the nationality strategy went far beyond a response to
Loewen’s plan based on the advertising campaign.
(b) O’Keefe’s racial politics strategy
65. Claimants’ case that O’Keefe engaged in a strategy of racial politics is largely based
on the efforts of O’Keefe to suggest that O’Keefe did business with black and white
people alike whereas Loewen did business with white people. This aspect of
Claimants’ case must be seen in a context in which both parties were endeavoring to
ingratiate themselves with the African-American jurors. Both parties added to their
legal teams prominent African-American lawyers. The lead counsel on each side was
a prominent African-American lawyer, Mr Gary for O’Keefe, Mr Sinkfield for
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Loewen. Two of the remaining four Loewen lawyers were well-known African-
American members of the Mississippi state legislature. Two other O’Keefe lawyers
were African-American lawyers. After the midway point of the trial had been
reached, Judge Graves observed that “the race card has already been played”.
Significantly, Judge Graves remarked “and I know that the jury knows what’s going
on”. In allowing an O’Keefe witness to give racially based evidence, Judge Graves
acknowledged that Loewen did not start this strategy and “was going to bring up the
rear” in that contest.
66. Loewen sought to counter this strategy by showing that it also did business with the
black community. Loewen called evidence of its contract with the National Baptist
Convention in order to show that Loewen was contributing to the economic
development of the black community. O’Keefe countered by claiming that Loewen
was racially exploiting the National Baptist Convention and the many black people
who were members of the Convention.
67. Respondent seeks to justify O’Keefe’s racial politics strategy by arguing that it was
relevant to the O’Keefe anti-trust case. Respondent argues that, in order to define
Loewen’s market power, it was necessary to establish that the relevant markets for
comparison included white funeral homes owed by Loewen and excluded African-
American funeral homes with which they did not compete. Yet O’Keefe’s anti-trust
case was that O’Keefe and Loewen competed only in predominantly white markets.
In any event, the O’Keefe racial politics strategy went well beyond defining relevant
markets.
(c) O’Keefe’s appeal to class-based prejudice
68. Claimants further complain that Mr Gary repeatedly portrayed Loewen as a large,
wealthy foreign corporation and contrasted Jerry O’Keefe as a small, local, family
businessman. There were a number of references by O’Keefe’s counsel emphasizing
this contrast. These references culminated in Mr Gary’s closing address in which he
incited the jury to put a stop to Loewen’s activities. Speaking of Jerry O’Keefe, Mr
Gary said:
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“He doesn’t have the money that they have nor the power, but he has heart
and character, and he refused to let them shoot him down.”
“You know your job as jurors gives you a lot of power … You have the
power to bring major corporations to their knees when they are wrong.
You can see wrong, make it right. Suffering and stop it.”
“Ray comes down here, he’s got his yacht up there, he can go to cocktail
parties and all that, but do you know how he’s financing that? By 80 and
90 year old people who go to get to a funeral, who go to pay their life
savings, goes into this here, and it doesn’t mean anything to him. Now,
they’ve got to be stopped … Do it, stop them so in years to come anybody
should mention your service for some 50 odd days on this trial, you can
say ‘Yes, I was there’, and you can talk proud about it.”
“1 billion dollars, ladies and gentlemen of the jury. You’ve got to put
your foot down, and you may never get this chance again. And you’re not
just helping the people of Mississippi but you’re helping poor people,
grieving families everywhere. I urge you to put your foot down. Don’t let
them get away with it. Thank you, and may God bless you all.”
69. Respondent seeks to justify these tactics on the basis that O’Keefe complained that
Loewen exploited “its unequal financial means to oppress the Plaintiffs”. The
rhetoric of O’Keefe’s counsel went well beyond any legitimate exercise in ventilating
O’Keefe’s oppression claim which, as will appear, was not submitted by Judge
Graves to the jury.
70. It is artificial to split the O’Keefe strategy into three segments of nationality-based,
race and class-based strategies. When the trial is viewed as a whole right through
from the voir dire to counsel’s closing address, it can be seen that the O’Keefe case
was presented by counsel against an appeal to home-town sentiment, favouring the
local party against an outsider. To that appeal was added the element of the powerful
foreign multi-national corporation seeking to crush the small independent competitor
who had fought for his country in World War II. Describing ‘Loewen’ as a Canadian
was simply to identify Loewen as an outsider. The fact that an investor from another
state, say New York, would or might receive the same treatment in a Mississippi court
as Loewen received is no answer to a claim that the O’Keefe case as presented invited
the jury to discriminate against Loewen as an outsider.
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XI. LOEWEN’S FAILURE TO OBJECT TO O’KEEFE’S PREJUDICIAL
CONDUCT AT THE TRIAL AND ITS CONSEQUENCES
71. Respondent also argues that Loewen’s counsel were at fault in failing to object to
O’Keefe’s nationality and racial politics strategy and appeals to class prejudice. The
point of this argument is to avoid attributing to the trial judge any part of the
responsibility for allowing O’Keefe to engage in these strategies and appeals. If
Loewen’s counsel did not object, then, so the argument runs, there was no error on the
part of the trial judge in failing to intervene of his own motion. For Claimants to
succeed in their claim, they must establish that the trial judge permitted or failed to
take steps (which he should have taken) to prevent the alleged conduct of O’Keefe’s
counsel and witnesses. Respondent is only responsible in international law for the
conduct of the Mississippi courts.
72. The transcript discloses many occasions when Loewen’s counsel did not object to
comments or evidence on these matters when they could have done so. Likewise,
there were occasions when they might have moved to have witness’ comments
deleted from the record on the ground that they were non-responsive. Mr Espy’s
reference to Canadian wheat farmers was an example.
73. In a jury trial, however, counsel are naturally reluctant to create the impression, by
continuously objecting, that they are seeking to suppress relevant evidence or that
they are relying on technicalities. So it is not to be expected that Loewen’s counsel
would object on every occasion when objectionable comment was made or
inadmissible evidence was given. The question is whether Loewen’s counsel
sufficiently brought their objections to the attention of the trial judge and whether the
trial judge was aware of the problem and should have taken action himself.
74. A reading of the transcript reveals that Loewen’s counsel at the trial did not make
any objections to evidence or comments on the ground that they were calculated to
foment prejudice on the grounds of nationality, race or class. Claimants have been
unable to point to any such objection. The silence of Loewen’s counsel on these
matters is a matter that calls for consideration in the light of the claims now pursued
by Claimants.
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75. With respect to O’Keefe’s nationality strategy, the explanation for the absence of
objection is obscure. Loewen’s counsel may have considered that the risk of a verdict
reflecting local favouritism was inherent in the litigation and that the best way of
handling the problem was to nail O’Keefe with his unfair and misleading advertising
campaign and rely on an instruction to the jury eliminating local favouritism. As it
happened, Judge Graves did not give the jury the instruction sought by Loewen, a
matter to which we shall come shortly. Loewen’s counsel were certainly aware of the
risk of local favouritism. They explored that risk with potential jurors in the voir dire.
It may well be that the trial judge’s unfavourable, dismissive, abrupt responses to their
objections during the voir dire, reinforced by similar responses during the trial, led
them to make the judgment that objections would be rejected and would result in
prejudice to Loewen in the eyes of the jury.
76. With respect to the issue of race, the explanation for the absence of any objection may
well be that Loewen’s counsel, conscious of their own efforts to ingratiate themselves
with the predominantly African-American jury, considered that the making of
objections to O’Keefe’s conduct would appear inconsistent and hypocritical.
77. The probable explanation for the absence of objection to class-based appeals to the
jury is that Loewen’s counsel regarded the problem as inherent in the litigation.
Further, the making of an objection would only serve to highlight the advantage
which Loewen enjoyed over O’Keefe in both wealth and power. So the giving of an
appropriate jury instruction would be the best answer to the difficulty.
XII. STEPS TAKEN BY LOEWEN TO PROTECT ITS POSITION
78. In pre-trial proceedings, Loewen moved to dismiss the anti-trust, unfair competition
and oppression claims on the ground that they were frivolous. These claims
generated at the trial many of the appeals to prejudice. Judge Graves peremptorily
dismissed this motion. Loewen also moved pre-trial to exclude evidence of special
damages, including the emotional distress claim. This motion was also dismissed by
Judge Graves.
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79. Claimants now submit that the denial of the two motions effectively preserved the
issues that prejudicial error was committed at trial by allowing evidence and
arguments of counsel based on these claims. It does not follow, however, that the
filing of these motions preserved Loewen’s position in so far as their claim is based
on prejudicial conduct and evidence.
80. In the voir dire, Loewen’s counsel objected to Mr Gary seeking commitments from
the jury panel in relation to their treatment of Loewen which he had described as “Ray
Loewen and his group from Canada”. The objection was overruled. Mr Gary then
asked whether potential jurors would be willing “to render a verdict against Ray
Loewen and his group and render a verdict for over $600 million?” An objection to
that question was overruled.
81. On the first day of the trial, Judge Graves ruled in response to two objections by
Loewen’s counsel that character evidence would be admitted generally. Loewen
counsel stated that the purpose of such evidence was to attract “sympathy and favor”
from the jury. At the end of the trial, Judge Graves dismissed two motions for
mistrial based on the character evidence. And, prior to the opening statements, the
trial judge overruled objections to the placing before the jury panel an enlarged
picture of all the members of the O’Keefe family and pictures of Jerry O’Keefe’s
military service.
82. Judge Graves, at the conclusion of the trial, rejected a jury instruction proposed by
Loewen’s counsel. The proposed instruction told the jury that they were not to be
swayed by bias, prejudice, favour or other improper motive. This instruction was
refused on the basis that it duplicated standard instruction “C-1”. Judge Graves began
his instructions to the jury with instruction “C-1”, which is given in every case and
addresses such general topics as the role of the jury, the court, the evidence and
counsel’s argument. Included in “C-1” was a short one-sentence warning against bias
in general, which made no reference to nationality-based or racial bias in particular.
The warning was in these terms:
“You should not be influenced by bias, sympathy or prejudice.”
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83. When Judge Graves asked if there were any objections to the instructions (including
C-1) which he had prepared, Loewen counsel sought a more elaborate direction on the
topic. Although Judge Graves summarily rejected this objection when counsel
acknowledged that there was nothing wrong with the Judge’s proposed direction, it
was clear that Claimant’s counsel was seeking an expanded direction to fit the
particular circumstances of the case.
84. Later Loewen’s counsel submitted a specific instruction to address the risk of
nationality-based, racial and class bias. The proposed instruction provided (App. at
A2231-32):
“The law is a respecter of no persons. All are equal in the eyes of the law
without regard to race, ethnicity, national origin, wealth or social status.
In deciding the issues presented in this case, you must not be swayed by
bias or prejudice or favor or any other improper motive. The parties, the
court and the public expect that you will carefully and impartially consider
all of the evidence in the case, follow the law as stated by the court, and
reach a just verdict based on these two things alone, regardless of the
consequences.
This case should be considered and decided by you as a matter between
parties of equal standing in the community, between persons or businesses
of equal standing and holding the same or similar stations in life. A
corporation or other business entity is entitled to the same fair trial at your
hands as a private individual.
The Loewen Group, Inc. is a corporation organized and having its
principal place of business in Vancouver, British Columbia, Canada.
Loewen Group International, Inc. is a corporation having its principal
place of business in Covington, Kentucky, just across the Ohio River from
Cincinnati. These parties are entitled to the same fair trial at your hands as
are other parties who are residents of Mississippi such as the O’Keefes and
the eight separate O’Keefe corporations that are Plaintiffs in this case. All
persons and parties stand equal before the law and are to be dealt with as
equals in this court of justice.”
85. O’Keefe’s counsel objected to this instruction as “cumulative” of the one-sentence
warning. This objection was summarily upheld by Judge Graves, notwithstanding
that the proposed instruction went far beyond the one-sentence warning in C-1 which
was, in the light of the circumstances of this case, inadequate to counter the prejudice
created by the way in which O’Keefe’s case had been presented.
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25
86. Loewen’s counsel did not object to the prejudicial and extravagant appeals in Mr
Gary’s closing address to the jury. In the light of the trial judge’s refusal of the jury
instruction that had been sought, they may well have concluded that no purpose
would be served by objecting.
87. Having regard to the history of the trial, and the way in which it was conducted by
Judge Graves, we do not consider that failures to object on the part of Loewen’s
counsel amounted to a waiver of the grounds on which Claimants now contend that
the conduct of the trial constituted a violation of NAFTA. There was a gross failure
on the part of the trial judge to afford the due process due to Loewen in protecting it
from the tactics employed by O’Keefe and its counsel. It defies common sense to
suggest that Loewen’s counsel by their conduct made an election not to pursue their
objections to those tactics and that Loewen waived its objections to the lack of due
process and to the grounds on which it now complains. Although “a State cannot
base the charges made before an international court or tribunal … on objections or
grounds, which were not previously raised before the municipal courts” (Judge
Jiménez de Aréchaga, “International Law in the Past Third of a Century”159 “Recueil
des Cours” (1978) at p 282), Claimants’ grounds were sufficiently raised at trial.
XIII. THE REFORM OF THE INITIAL JURY VERDICT
88. In punitive damages cases, Mississippi law requires a bifurcated trial procedure. At
the first stage, the jury determines liability and compensatory damages; at the second
stage, the jury considers whether to award punitive damages. The jury cannot
consider liability and punitive damages at the same time. Miss. Code Ann. §11-1-
65(b-c).
89. In conformity with this provision, Judge Graves instructed the jury only on liability
and compensatory damages issues. The parties did not adduce evidence or present
argument on punitive damages in the first stage of the trial. Nor did Judge Graves
give the jury any instructions about punitive damages.
90. In the jury voir dire, however, O’Keefe’s counsel informed the panel of potential
jurors that there was a claim for punitive damages. O’Keefe’s counsel asked the
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26
panel whether they would have any hesitation in awarding a verdict for over $600
million damages if the plaintiffs’ case was proved according to law. Loewen’s
counsel’s objection that this question amounted to seeking a commitment from the
jury was overruled. In the early stages of the trial, O’Keefe’s counsel made reference
to the claim for punitive damages. Loewen’s counsel objected but the trial judge gave
no instruction to the jury in response to the objection.
91. The matters mentioned in paras. 89 and 90 may well have induced the jury to
understand that they were to award both compensatory and punitive damages together
if they found for O’Keefe on liability.
92. On November 1, 1995, the jury returned a verdict for O’Keefe of $260,000,000.
This amount was said to be made up as follows (App. at A651-658):
(Wright and Ferguson contracts)
Breach of three of the Wright and Ferguson contracts 31,200,000
Tortious interference with one or more of the three
Wright and Ferguson contracts 7,800,000
Tortious (wilful, intentional) breach of a Wright and
Ferguson contract 23,400,000
Breach of implied covenants of good faith and
Fair dealing in a Wright and Ferguson contract 15,600,000
(1991 Agreement)
Wilful and malicious breach of the 1991 Agreement 54,600,000
Tortious (wilful and intentional) breach of the
1991 Agreement 54,600,000
Breach of an implied covenant of good faith and
Fair dealing in the 1991 Agreement 36,400,000
State anti-monopoly law breaches 18,200,000
Common law fraud 18,200,000
$ 300,000,000
93. The individual amounts listed in the previous paragraph total $260,000,000 (the
verdict brought in by the jury) not $300,000,000. There was no allocation in the
individual amounts or in the total amount of the verdict as between compensatory and
punitive damages.
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27
94. A note written by the jury foreman to Judge Graves, after the verdict was announced,
stated that the $260 million covered both compensatory damages of $100 million and
punitive damages of $160 million, and that the $260,000,000 was a “negotiated
compromise” between a low of $100,000,000 and a high of $300,000,000 (App. at
A659).
95. How, in the light of the way the amount of $260,000,000 was calculated, the verdict
was divided into $100,000,000 compensatory damages and $160,000,000 punitive
damages remains a complete mystery. The way in which the verdict was constructed,
including, as it did, compensatory and punitive damages, demonstrates that there was
a failure adequately to instruct the jury to limit their initial award to compensatory
damages.
96. Immediately after announcement of the verdict, Loewen moved for a mistrial,
contending that the verdict was biased, excessive and procedurally defective because
it covered punitive damages. Judge Graves denied the motion without discussion
(Transcript at 5739). Judge Graves purported to reform the verdict. He informed the
jury that he accepted the verdict of $100,000,000 compensatory damages but did not
accept the award of $160,000,000 punitive damages. The jury may well have
interpreted the rejection of this award as an indication that it was inadequate.
XIV. THE PUNITIVE DAMAGES HEARING AND VERDICT
97. Judge Graves then directed that the trial enter the punitive damages stage. It took
place on November 2, 1995. Bernard Pettingill, an O’Keefe witness, testified that the
net worth of Loewen was almost $3.2 billion, though he conceded that its market
capitalization, based on the current value of its shares, was less than $1.8 billion. He
explained the difference by saying that the market had failed to take into account the
“future value” of Loewen’s contract with the National Baptist Convention (Transcript
at 5762).
98. On the other hand Loewen presented expert evidence that its entire net worth, as
reflected in filings with the US Securities and Exchange Commission was between
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$600 and $700 million (Transcript at 5771-5772) and that its market value was
approximately $1.7 billion (Transcript at 5777).
99. In his closing address, Mr Gary returned to his earlier themes: “Ray Loewen is not
here to-day. He’s not here and I think that’s the ultimate arrogance … That’s the
ultimate arrogance for him to think that he can do what he’s doing to people like Jerry
O’Keefe … and to the consumers of this stage, and he can deal with it in this fashion”
(Transcript at 5794-5795). Mr Gary claimed that Loewen officials were “smiling
when they charge grieving families in Corinth, Mississippi”(Transcript at 5796).
100. As he had done in his earlier closing address, Mr Gary asserted that Loewen would
make “over $7.9 billion” off the National Baptist Convention Contract, an assertion
unsupported by evidence. He further asserted that this profit would be made from
“just selling vaults” because Loewen would not admit black people to Loewen funeral
homes for burial. Again this assertion was unsupported by evidence. The closing
address concluded with the exhortation:
“1 billion dollars, 1 billion dollars … You’ve got to put your foot down,
and you may not ever get this chance again. And you’re not just helping
people of Mississippi, but you’re helping … families
everywhere.”(Transcript at 5809).
101. The jury returned a verdict for $400,000,000 punitive damages. On November 6,
1995, judgment for a total verdict of $500,000,000 was entered.
102. On that day Loewen filed a motion to reduce the punitive damages on the grounds of
bias and excessiveness (App. at A1196). On November 15, 1995, Loewen filed
another motion for judgment notwithstanding the verdict, or for a new trial, or for
remittitur (App. at A660) on the ground that the jury’s verdict exhibited bias, passion
and prejudice against Loewen and on the ground that each element in the damage’s
award was excessive.
103. On November 20, 1995, Judge Graves denied Loewen’s post trial motions.
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XV. THE CLAIM THAT THE $500 MILLION VERDICT WAS EXCESSIVE
104. The total damages award of $500 million was by far the largest ever awarded in
Mississippi.
105. Claimants had a very strong case for arguing that the damages awarded, both
compensatory and punitive, were excessive, and that the amounts were so inflated as
to invite the inference that the jury was swayed by prejudice, passion or sympathy.
The initial award of punitive damages, despite the trial judge’s instruction that the
jury was then to confine itself to issues of liability and compensatory damages,
indicates that the jury was minded to award punitive damages against Loewen without
instructions from the trial judge and without evidence to support the amount of an
award. Further, the initial award of damages included amounts for anti-trust
oppression breaches and the fraud claim, although Mr Gary, in his closing address,
had not asked for damages on those claims. The award of $100,000,000
compensatory damages was very close to the total amount of $105,852,000 which
was the amount sought by Mr Gary from the jury for all claims, though it was
calculated by reference to the contract and tort claims.
106. The award on the breach of the Wright and Ferguson contracts greatly exceeds the
value placed on those contracts in evidence by the O’Keefe witness, $980,000
(Transcript at 2367), which was the amount sought from the jury by Mr Gary
(Transcript at 5711-5712). The total amount initially awarded in respect of the
various claims made in relation to these contracts, $78,000,000, allowing for what
was at that stage of the case an impermissible punitive component, bore no
relationship to the apparent value of the contracts. It is difficult to avoid the
conclusion that there was a multiplication of damages on claims which overlapped.
107. Likewise, the damages awarded in relation to the 1991 settlement agreement appear to
be grossly excessive. In his closing address, Mr Gary sought a total of $104,852,000
for the claims based on the 1991 agreement, made up of $74,500,000 for emotional
distress and the remainder in economic damages, yet in the O’Keefe “Amended and
Supplemental Complaint” sought $625,000 only in emotional damages for Jerry
O’Keefe and his son (App. at A202). This amount was mentioned by O’Keefe’s
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30
counsel in the opening statement. The only evidence of emotional distress was given
by Jerry O’Keefe and his daughter Susan. They spoke of his sleepless nights, worry
and stress. There was no expert evidence, no evidence of medical or psychiatric
treatment, medication, physical manifestation of distress and no evidence whatsoever
relating to the son.
108. Mr Gary sought from the jury, at least by implication, an amount of $30 to $35
million in economic damages (Transcript at 5713-5715), resulting from breach of the
1991 agreement. Yet, allowing for an impermissible element of punitive damages,
the jury initially awarded $145,600,000 damages for the claims on the 1991
agreement. The amount of $30 to $35 million sought by Mr Gary included $20
million in lost “future revenue” from the Family Care Company (Transcript at 4848-
4864), $6 million in lost “future revenue” from Riemann Trust Funds (Transcript at
1400-1401) and $4.5 million in lost “future revenue” from the Family Care Trust
Rollover (Transcript at 2366, 5566-5568). Under Mississippi law, lost future profits
are recoverable as damages but lost future revenue is not recoverable (Fred’s Stores
of Mississippi v M & H Drugs Inc. 725 So. 2d 902, 914-915 (1998)).
109. The duplication of awards on the Wright and Ferguson contracts and the 1991
agreement is an obvious problem. That agreement extinguished all claims arising out
of the then existing litigation between O’Keefe and Loewen. The pending lawsuit
included claims for breach of the Wright and Ferguson contracts. If the 1991
agreement was enforceable, claims for breaches of the Wright and Ferguson contracts
could not be maintained.
110. Again, Claimants had a strong ground for claiming that the fraud damages were
excessive. As already noted, Mr Gary did not ask for these damages. The only fraud
claim involved alleged misstatements about the 1991 agreement and its performance.
Why the fraud claim would result in damages additional to the damages awarded on
the other claims made in respect of the 1991 agreement is by no means apparent.
111. Claimants’ challenge to the award on the anti-trust claims appears to misconceive the
nature of the claim. It was not, as Claimants seem to suggest, confined to a claim
based on loss sustained as a result of impermissible pricing below cost. The O’Keefe
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31
case was mainly based on the unfair means by which Loewen attempted to attain its
monopoly power. It was O’Keefe’s case that Loewen violated the anti-monopoly
laws by manipulating the 1991 agreement in bad faith in order to drive O’Keefe out of
funeral home markets, thereby enabling Loewen to raise prices without fear of
competition. It was also O’Keefe’s case that Loewen’s treatment of O’Keefe was part
of a broader practice of destroying or excluding smaller competitors by unfair means.
There is expert evidence before us in the form of a declaration by Mr Jack Dunbar
that O’Keefe’s allegations were more than sufficient to state a claim for a violation of
Mississippi anti-monopoly laws. And evidence was presented at the trial to
substantiate the monopolization claims. That evidence included the testimony of a
credible expert Mr Dale Espich whose testimony dealt in detail with Loewen’s
monopolistic practices. He described Loewen’s domination of various Mississippi
markets, its persistent practice in raising prices, particularly in dominated markets
(Transcript at 1837-1840), its tendency to cluster its purchases of funeral homes to
dominate markets (Transcript at 1845-1846) and Loewen’s success in excluding
O’Keefe from the largest Mississippi market – Jackson. (Transcript at 1867). This
testimony was not challenged in cross-examination. So Claimants’ argument that
there was no legal basis for the anti-trust claim appears to be without substance.
112. There is no occasion to deal with the so-called “oppression” claim. No such claim
was submitted by Judge Graves to the jury and no verdict was rendered on such a
claim. That O’Keefe pleaded “oppression” as a separate count is therefore
immaterial.
113. The total award (even the award of compensatory damages) appears to be grossly
disproportionate to the damage suffered by O’Keefe. The dispute involved three
contracts valued at $980,000 and an exchange of two funeral homes worth
approximately $2.5 million for a Loewen funeral insurance company valued at
approximately $4 million. The jury foreman said “May be O’Keefe lost $1 million
dollars. $6 million to $8 million I’d say was right …” (App. at A3079). Respondent
seeks to justify the award of $500 million not by reference to the substance of the
dispute but by reference to Loewen’s “monopolization of funeral home markets and
overcharging of grief-stricken consumers of funeral services”. Granted that a
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32
substantial award of damages on this claim might well be justified, Claimants had
very strong grounds for arguing that verdict of $500,000,000 was excessive.
114. Notwithstanding the viability of the anti-trust claim, Claimants had very strong
prospects of successfully appealing the damages awarded on the ground that they
were excessive.
XVI. RESPONDENT’S CASE THAT EXCESSIVE VERDICT WAS CAUSED BY
LOEWEN’S FLAWED TRIAL STRATEGY
115. Respondent argues that the excessive verdict was not caused by inadmissible appeals
to prejudice and local favouritism but by Loewen’s flawed trial strategy. First, it is
said that because the foreman of the jury was formerly a Canadian, it would be wrong
to impute anti-Canadian bias to the jury. This argument is based very largely on posttrial
interviews with the jurors, including the foreman. We do not regard these
interviews as establishing that the verdict was uninfluenced by appeals to local
sentiment, racial or class-based prejudice. These influences may well have played a
part in the verdict, even if there was an absence of actual bias on the part of the jurors
themselves. The magnitude of the verdict suggests that the verdict was influenced by
bias, prejudice, passion or sympathy.
116. Respondent’s argument on this point is based on the Opinion of Professor Stephan
Landsmann who has pointed to a number of strategical or tactical decisions taken by
Loewen’s counsel during the course of the trial, particularly in relation to the punitive
damages stage of the trial. There is much to be said for the view that a number of
decisions taken by Loewen’s counsel, viewed with the advantage of hindsight, were
unwise. Further, four individuals who had been employed by Loewen gave evidence
which was very critical of Loewen’s business practices. One of them testified to a
policy of constant and aggressive price increases for funeral services (Transcript at
1228,1240). The same witness described communications in which O’Keefe was
given misleading information or in which material information was withheld in
evident breach of contract (Transcript at 1217-1223). The Riemann brothers wrote
letters to Loewen complaining about the business methods of Loewen.
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33
117. Professor Landsmann points also to four matters which would have strengthened the
O’Keefe charges against Loewen. They were:
(1) the belated disclosure and production of the Riemann letters (already
mentioned) which appear to support a number of significant O’Keefe
allegations;
(2) the striking by the Court of the testimony of a Loewen witness, Ellis, after it
was revealed that Loewen’s counsel had not complied with the court’s
sequestration order with respect to his pre-trial preparation;
(3) frequent claims of memory failure by Raymond Loewen in direct and crossexamination,
a matter commented upon by Judge Graves; and
(4) the contradiction by Loewen witnesses and by documents of Loewen’s
counsel’s statements about the net worth of Loewen during the punitive
damages stage of the trial.
118. The matters referred to in the two preceding paragraphs unquestionably strengthened
the O’Keefe case against Loewen and highlighted Loewen’s predatory and aggressive
conduct. But these matters do not erase the prejudicial conduct at trial on O’Keefe’s
part or eliminate the influence it was calculated to have on the jury.
XVII. EVALUATION OF THE TRIAL
119. By any standard of measurement, the trial involving O’Keefe and Loewen was a
disgrace. By any standard of review, the tactics of O’Keefe’s lawyers, particularly
Mr Gary, were impermissible. By any standard of evaluation, the trial judge failed to
afford Loewen the process that was due.
120. The trial before Judge Graves lasted some 50 days. During such a protracted period
of adversarial behavior, mistakes and errors will occur; even the most even-handed
judge will not be able to entirely preclude appeals to the jury’s passions. Appellate
courts in the United States, and indeed, in most countries in the world, have
recognized that “perfect trials” are not to be expected. Doctrines of harmless error,
invited error, and waiver of the right to object to prejudicial conduct are commonly
invoked to sustain the results of less than perfect trials. Clearly, an arbitral tribunal
applying the provisions of a treaty and of international law is even more constrained
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to avoid nitpicking a trial record and the rulings of a trial judge. Even when all of
those limitations are applied most rigorously, the trial and its $500,000,000 verdict
cannot be countenanced.
121. Respondent obviously could not defend some of the lawyer conduct and trial judge
inadequacy previously referred to. Instead it argued that some of the appellate
doctrines mentioned above precluded the tribunal from relying on specific flaws that
were the most egregious. We need not resolve the domestic procedural disputes
which arose at the trial such as the question whether Loewen was entitled to the
particular instruction which it sought as to bias. The question is whether the whole
trial, and its resultant verdict, satisfied minimum standards of international law, or the
“fair and equitable treatment and full protection and security” that the Contracting
States pledged in Article 1105 of NAFTA. This question is addressed in paras. 124-
137.
122. If a single instance of the unfair treatment that was accorded Loewen at the trial level
need be cited, it would be the manner in which the large and excessive verdict was
constructed by the judge and the jury. As has previously been detailed, the jury
originally came in with a verdict of $260,000,000, which the foreman indicated
included compensatory damages of $100,000,000 and punitive damages of
$160,000,000. Since Mississippi law required a separate prove up of punitive
damages (which had not occurred), the judge accepted the $100,000,000
compensatory damages portion of the verdict, but conducted a further, and minimal,
hearing of evidence on the punitive damages question. The jury subsequently came
back with the much enhanced punitive damages award of $400,000,000, making the
total verdict of $500,000,000 the largest in Mississippi history. Whether the jury
interpreted Judge Graves’ procedure as an invitation to increase the verdict or not, the
results compounded the excessiveness of the original verdict. The methods employed
by the jury and countenanced by the judge were the antithesis of due process. But we
repeat this is only one instance of many.
123. In reaching the conclusion stated in the previous paragraph, we take it to be the
responsibility of the State under international law and, consequently, of the courts of a
State, to provide a fair trial of a case to which a foreign investor is a party. It is the
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responsibility of the courts of a State to ensure that litigation is free from
discrimination against a foreign litigant and that the foreign litigant should not
become the victim of sectional or local prejudice. In the United States and in other
jurisdictions, advocacy which tends to create an atmosphere of hostility to a party
because it appeals to sectional or local prejudice, has been consistently condemned
and is a ground for holding that there has been a mistrial, at least where the conduct
amounts to an irreparable injustice (New York Central R.R. Co. v Johnson 279 US
310, 319 (1929); Le Blanc v American Honda Motor Co. Inc. 688 A 2d 556, 559). In
Walt Disney World Co. v Blalock 640So 2d 1156,1158, a new trial was ordered where
closing argument was pervaded with inflammatory comment and personal opinion of
counsel, although the offensive comments were not objected to. See also Whitehead v
Food Max of Mississippi Inc. 163 F 3d 265, 276-278 (where a new trial was ordered
on the ground that plaintiffs’ counsel repeatedly “reminded the jury that [defendant]
Kmart is a national … corporation … [and] contrasted that with” his and his client’s
status as a Mississippi resident, despite the fact that most of the objectionable
comments were not objected to); Norma v Gloria Farms Inc. 668 So 2d
1016,1021,1023 (new trial ordered where defense counsel in closing remarks
appealed to jurors’ self-interest, despite plaintiff’s counsel’s failure to object). In
such circumstances the trial judge comes under an affirmative duty to prevent
improper tactics which will result in an unfair trial (Pappas v Middle Earth
Condominium Association 963 F 2d 534 539, 540; Koufakis v Carvel 425 F 2d 892,
900).
XVIII. NAFTA ARTICLE 1105
124. Article 1105 which is headed “Minimum Standard of Treatment” provides:
“1. Each party shall accord to investments of investors of another party
treatment in accordance with international law, including fair and
equitable treatment and full protection and security.”
The precise content of this provision, particularly the meaning of the reference to
“international law” and the effect of the inclusory clause has been the subject of
controversy.
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125. On July 31, 2001, the Free Trade Commission adopted an interpretation of Article
1105(1). The Commission’s interpretation is in these terms:
“Minimum Standard of Treatment in Accordance with International Law
(1) Article 1105(1) prescribes the customary international law minimum
standard of treatment of aliens as the minimum standard of treatment to be
afforded to investments of investors of another Party.
(2) The concepts of “fair and equitable treatment” and “full protection and
security” do not require treatment in addition to or beyond that which is
required by the customary international law minimum standard of treatment
of aliens.
(3) A determination that there has been a breach of another provision of the
NAFTA, or of a separate international agreement, does not establish that
there has been a breach of Article 1105(1).”
126. An interpretation issued by the Commission is binding on the Tribunal by virtue of
Article 1131(2).
127. Although Claimants, in their written materials, submitted that the Commission’s
interpretation adopted on July 31, 2001 went beyond interpretation and amounted to
an unauthorized amendment to NAFTA, Claimants did not maintain that submission
at the oral hearing. The oral argument presented by Mr Cowper QC on behalf of
Claimants was consistent with the Commission’s interpretation of Article 1105(1).
Mr Cowper QC submitted that, accepting that Article 1105(1) prescribes the
customary international law standard of treatment of aliens as the minimum standard
of treatment to be afforded to investments of an investor of another Party, the
treatment of Loewen by the Mississippi courts violated that minimum standard.
128. The effect of the Commission’s interpretation is that “fair and equitable treatment”
and “full protection and security” are not free-standing obligations. They constitute
obligations only to the extent that they are recognized by customary international law.
Likewise, a breach of Article 1105(1) is not established by a breach of another
provision of NAFTA. To the extent, if at all, that NAFTA Tribunals in Metalclad
Corp v United Mexican States ICSID Case No. ARB(AF)/97/1 (Aug 30, 2000), S.D.
Myers, Inc. v Government of Canada (Nov 13, 2000) and Pope & Talbot, Inc. v
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Canada, Award on the Merits, Phase 2, (Apr 10, 2001) may have expressed contrary
views, those views must be disregarded.
129. It is not in dispute between the parties that customary international law is concerned
with denials of justice in litigation between private parties. Indeed, Respondent’s
expert, Professor Greenwood QC, acknowledges that customary international law
imposes on States an obligation “to maintain and make available to aliens, a fair and
effective system of justice” (Second Opinion, para. 79).
130. Respondent submits that, in conformity with the accepted standards of customary
international law, it is for Loewen to establish that the decisions of the Mississippi
courts constituted a manifest injustice. Professor Greenwood states in his Second
Opinion:
“the awards and texts make clear that error on the part of the national court
is not enough, what is required is “manifest injustice” or “gross
unfairness” (Garner, “International Responsibility of States for Judgments
of Courts and Verdicts of Juries amounting to Denial of Justice”, 10 BYIL
(1929), p 181 at p 183), “flagrant and inexcusable violation” (Arechaga,
[“International Law in the Past Third of a Century”, 159 “Recueil des
Cours” (1978) at p 282]) or “palpable violation” in which “bad faith not
judicial error seems to be the heart of the matter” (O’Connell,
International Law, 2nd ed, 1970) p 498). As Baxter and Sohn put it (in the
Commentary to their Draft Convention on the Responsibility of States for
Injuries to Aliens) “the alien must sustain a heavy burden of proving that
there was an undoubted mistake of substantive or procedural law operating
to his prejudice”.
131. In Pope & Talbot Inc. v Canada, Award in respect of damages, May 31, 2002 a
NAFTA Tribunal considered the effect of the Interpretation of July 31, 2001. The
Tribunal concluded (para. 62 of its Award) that the content of custom in international
law is now represented by more than 1800 bilateral investment treaties which have
been negotiated. Nevertheless the Tribunal did not find it necessary to go beyond the
formulation by the International Court of Justice in Elettronica Sicula SpA (ELSI)
United States v Italy (1989) ICJ 15 at 76:
“Arbitrariness is not so much something opposed to a rule of law, as
something opposed to the rule of law … It is wilful disregard of due
process of law, an act which shocks, or at least surprises a sense of judicial
propriety.”
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132. Neither State practice, the decisions of international tribunals nor the opinion of
commentators support the view that bad faith or malicious intention is an essential
element of unfair and inequitable treatment or denial of justice amounting to a breach
of international justice. Manifest injustice in the sense of a lack of due process
leading to an outcome which offends a sense of judicial propriety is enough, even if
one applies the Interpretation according to its terms.
133. In the words of the NAFTA Tribunal in Mondev International Ltd v United States of
America ICSID Case No. ARB (AF)/99/2 , Award dated October 11, 2002,
“the question is whether, at an international level and having regard to
generally accepted standards of the administration of justice, a tribunal can
conclude in the light of all the facts that the impugned decision was clearly
improper and discreditable, with the result that the investment has been
subjected to ‘unfair and inequitable treatment’.”
134. If that question be answered in the affirmative, then a breach of Article 1105 is
established. Whether the conduct of the trial amounted to a breach of municipal law
as well as international law is not for us to determine. A NAFTA claim cannot be
converted into an appeal against the decisions of municipal courts.
135. International law does, however, attach special importance to discriminatory
violations of municipal law (Harvard Law School, Research in International Law,
Draft Convention on the Law of Responsibility of States for Damage Done in Their
Territory to the Persons or Property of Foreigners (“1929 Draft Convention”) 23
American Journal of International Law 133, 174 (Special Supp. 1929) (“a judgment
[which] is manifestly unjust, especially if it has been inspired by ill-will towards
foreigners as such or as citizens of a particular states”); Adede, A Fresh Look at the
Meaning of Denial of Justice under International Law, XIV Can YB International
Law 91 (“a … decision which is clearly at variance with the law and discriminatory
cannot be allowed to establish legal obligations for the alien litigant”). A decision
which is in breach of municipal law and is discriminatory against the foreign litigant
amounts to manifest injustice according to international law.
136. In the present case, the trial court permitted the jury to be influenced by persistent
appeals to local favouritism as against a foreign litigant.
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137. In the light of the conclusions reached in paras. 119-123 (inclusive) and 136, the
whole trial and its resultant verdict were clearly improper and discreditable and
cannot be squared with minimum standards of international law and fair and equitable
treatment. However, because the trial court proceedings are only part of the judicial
process that is available to the parties, the rest of the process, and its availability to
Loewen, must be examined before a violation of Article 1105 is established. We
address this question in paras. 142-157 (inclusive), 165-171 (inclusive) and 207-217
(inclusive).
XIX. THE CLAIM OF BIAS
138. Claimants’ argument that Judge Graves and the jury were actually biased against
Loewen is not made out. There is no direct evidence of bias on the part of Judge
Graves or the jury. Nor do the jury interviews demonstrate that the jury was biased.
The interviews reveal that the jury took an adverse view of Loewen’s conduct based
on evidence which included testimony of Loewen employees and former employees.
Nor does the evidence warrant the drawing of an inference of bias against the jury,
though there is strong reason for thinking that the jury were affected by the persistent
and extravagant O’Keefe appeals to prejudice. Although the trial judge’s conduct of
the trial is explicable by reference to bias, the evidence does not support a finding that
he was biased against Loewen. We take the view that the judge, for reasons which do
not clearly appear, failed to discharge his paramount duty to ensure that Loewen
received a fair trial.
XX. NAFTA ARTICLE 1102
139. Article 1102 bars discrimination against foreign investors and their investments.
Article 1102(1) and (2) requires each Party to accord investors and investments of
another Party “treatment no less favorable than it accords in like circumstances to its
own investors” or their investments. With respect to a state or province Article
1102(3) requires
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“treatment no less favorable than the most favorable treatment accorded,
in like circumstances, by that state or province to investors, and to
investments of investors, of the Party of which it forms part.”
The effect of these provisions, as Respondent’s expert Professor Bilder states, is that a
Mississippi court shall not conduct itself less favourably to Loewen, by reason of its
Canadian nationality, than it would to an investor involved in similar activities and in
a similar lawsuit from another state in the United States or from another location in
Mississippi itself. We agree also with Professor Bilder when he says that Article
1102 is direct only to nationality-based discrimination and that it proscribes only
demonstrable and significant indications of bias and prejudice on the basis of
nationality, of a nature and consequence likely to have affected the outcome of the
trial.
140. A critical problem in the application of Article 1102 to the facts of this case is that we
do not have an example of “the most favorable treatment accorded, in like
circumstances” by a Mississippi court to investors and investments of the United
States. Claimants submit that the treatment accorded O’Keefe is an appropriate
comparator, that Loewen and O’Keefe were “in like circumstances” because they
were litigants in the same case. But their circumstances as litigants were very
different and it is not possible to apply Article 1102(3) by reference to the treatment
accorded to O’Keefe. What Article 1102(3) requires is a comparison between the
standard of treatment accorded to a claimant and the most favourable standard of
treatment accorded to a person in like situation to that claimant. There are no
materials before us which enable such a comparison to be made.
XXI. NAFTA ARTICLE 1110
141. Claimants’ reliance on Article 1110 adds nothing to the claim based on Article 1105.
In the circumstances of this case, a claim alleging an appropriation in violation of
Article 1110 can succeed only if Loewen establishes a denial of justice under Article
1105.
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XXII. THE NECESSITY FOR FINALITY OF ACTION ON THE PART OF THE
STATE’S LEGAL SYSTEM
142. Having reached the conclusion that the trial and the verdict were improper and cannot
be squared with minimum standards of fair international law and fair and equitable
treatment, we must now consider the question whether, in the light of subsequent
proceedings, the trial and the verdict alone or in combination with the subsequent
proceedings amounted to an international wrong. We take up at this point the
Respondent’s second ground of objection to competence and jurisdiction which
covers much of the same ground and was not resolved in the Tribunal’s Decision of
January 5, 2001.
143. Respondent argues that the expression “measures adopted or maintained by a Party”
must be understood in the light of the principle of customary international law that,
when a claim of injury is based upon judicial action in a particular case, State
responsibility only arises when there is final action by the State’s judicial system as a
whole. This proposition is based on the notion that judicial action is a single action
from beginning to end so that the State has not spoken until all appeals have been
exhausted. In other words, the State is not responsible for the errors of its courts
when the decision has not been appealed to the court of last resort. Respondent
distinguishes this substantive requirement of customary international law for a final
non-appealable judicial action, when an international claim is brought to challenge
judicial action as a breach of international law, from international law’s procedural
requirement of exhaustion of local remedies (“the local remedies rule”).
144. Respondent submits that there is nothing to show that in Chapter Eleven the Parties
intended to derogate from this substantive rule of international law when judicial
action is the basis of the claim for violation of NAFTA. Respondent argues that the
terms of Article 1101, “adopted or maintained by a Party”, incorporate the substantive
rule of international law and require finality of action. Only those judicial decisions
that have been accepted or upheld by the judicial system as a whole, after all available
appeals have been exhausted, so the argument runs, can be said to possess that degree
of finality that justifies the description “adopted or maintained”.
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145. Claimants’ response to this argument is that Article 1121(1)(b) of NAFTA requires an
arbitral claimant to waive its local remedies, not exhaust them. This Article
authorizes the filing of a Chapter Eleven claim only if
“the investor and the enterprise waive their right to initiate or continue
before any administrative tribunal or court under the law of any Party, or
other dispute settlement procedures, any proceedings with respect to the
measure of the disputing Party that is alleged to be a breach referred to in
Article 1116 …”.
Claimants submit, first, that “the Article eliminates the necessity to exhaust local
remedies provided by the host country’s administrative or judicial courts”. (B.
Sepulveda Amor, International Law and International Sovereignty: The NAFTA and
the Claims of Mexican Jurisdiction, 19 Houston Journal of International Law 565 at
574 (1997)). Claimants submit, secondly, that the so-called substantive principle of
finality is no different from the local remedies rule and that international tribunals
have reviewed the decisions of inferior municipal courts where the exhaustion
requirement has been waived or is otherwise inapplicable.
146. Respondent argues that Article 1121(2)(b) is not a waiver provision and that it does
not waive the local remedies rule or for that matter the requirement that the judicial
process be pursued to the highest court where a judicial act constitutes the breach of
international law. Respondent appears to acknowledge, however, that the Article
relaxes the local remedies rule to a partial but limited extent, without defining or
otherwise indicating what that extent is or may be.
147. As Professor Greenwood points out in his First Opinion, usually there are three
separate issues to be considered:
(a) whether there is an act which is imputable to the respondent State;
(b) whether that act is contrary to international law; and
(c) whether the respondent State can be held responsible for that act in
international proceedings until local remedies have been exhausted.
148. In this case, we are not concerned with the question whether there is an act which is
imputable to Respondent. A decision of a court of a State is imputable to the State
because the court is an organ of the State. This proposition was acknowledged in the
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Tribunal’s Decision of January 5, 2001. We are, of course, concerned with the
question whether the relevant decisions of the Mississippi courts constitute violations
of international law because this is not a case where the alleged violation of
international law is constituted by a non-judicial act or decision.
149. The local remedies rule which requires a party complaining of a breach of
international law by a State to exhaust the local remedies in that State before the party
can raise the complaint at the level of international law is procedural in character.
Article 44 of the latest International Law Commission (ILC) Draft Articles on State
Responsibility demonstrates that the local remedies rule deals with the admissibility
of a claim in international law, not whether the claim arises from a violation or breach
of international law (Text provisionally adopted on 31 May, 2001, UN Doc. A/CN
4/L 602. Article 44 is identical to Article 45 of the 2000 draft referred to in the
Decision of January 5, 2001, para. 67). Article 22 of the earlier draft, which had been
prepared in 1975, embodied a substantive approach which was strongly criticized by
governments (most notably the United Kingdom) and was not followed in Elettronica
Sicula SpA (ELSI) United States v Italy (1989) ICJ 15 at para. 50. See Second
Opinion of Professor Greenwood, paras 52-54).
150. Although Loewen submits, in accordance with an Opinion of Sir Robert Jennings,
that the local remedies rule is essentially confined to cases of diplomatic protection,
that view does not coincide with that of other commentators. See García-Amador,
Sohn and Baxter, Recent Codification of the Law of State Responsibility for Injuries
to Aliens (1974) pp 143, 129-132; see also García-Amador’s Draft Articles on State
Responsibility prepared in 1960 for the International Law Commission, noting his
comment at p. 79:
“Article 21 of the draft sets forth the basis of a procedure which would
enable the alien himself, once local remedies have been exhausted, to
submit an international claim to obtain reparation for injury suffered by
him.”
See also OECD Draft Convention on the Protection of Foreign Property, 1967, Article
7(b) and Commentary (OECD Publication No. 23081 (1967) pp 36-41. Professor
James Crawford SC, rapporteur on State Responsibility of the ILC has stated “the
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exhaustion of local remedies rule is not limited to diplomatic protection” (UN Doc.
A/CN 4/517, p 33).
151. Professor Greenwood in his First Opinion refers to “the principle that a court decision
which can be challenged through the judicial process does not amount to a denial of
justice”. The principle is supported by a number of decisions of the United States-
Mexican Claims Tribunal (Jennings, Laughland & Co v Mexico (Case No. 374, 3
Moore, International Arbitrations (1898) p 3135); Green v Mexico (ibid, at p 3139);
Burn v Mexico (ibid at 3140); The Ada (ibid at 3143); Smith v Mexico (ibid at 3146);
Blumhardt v Mexico (ibid at 3146); The Mechanic (Corwin v Venezuela) (ibid 3210 at
3218). In the first of these decisions, Umpire Thornton observed (at p 3136):
“The Umpire does not conceive that any government can thus be made
responsible for the conduct of a judicial officer when no attempt has been
made to obtain justice from a higher court.”
152. Text writers also give support to the principle (Oppenheim’s International Law, 9th
ed, 1992, vol I, pp 543-545; Freeman, International Responsibility of States for
Denial of Justice, (1938) pp 291-292, 311-312), although Freeman regards the rule as
linked to the local remedies rule (at p 415).
153. The principle that a court decision which can be challenged through the judicial
process does not amount to a denial of justice at the international level has been
linked to the duty imposed upon a State by international law to provide a fair and
efficient system of justice. Professor James Crawford SC, rapporteur to the ILC, has
stated:
“There are also cases where the obligation is to have a system of a certain
kind, e.g. the obligation to provide a fair and efficient system of justice.
There systematic considerations enter into the question of breach, and an
aberrant decision by an official lower in the hierarchy, which is capable of
being reconsidered, does not of itself amount to an unlawful act”.
(UN Doc. A/CN 4/498, para. 75). Judge Jiménez de Aréchaga took the same view of
the State’s responsibility, stating that it was an essential condition of a State being
held responsible for a judicial decision in breach of municipal law that the decision
must be a decision of a court of last resort, all remedies having been exhausted
(“International Law in the Past Third of a Century”, 159 Recueil des Cours (1978) at
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p 282, where the judge expressed the reason for the requirement as being that States
provide remedies to correct the natural fallibility of their judges). He considered that
a corollary of the requirement is that “a State cannot base the charges made before an
international court or tribunal … on objections or grounds which were not previously
raised before the municipal courts”
154. No instance has been drawn to our attention in which an international tribunal has
held a State responsible for a breach of international law constituted by a lower court
decision when there was available an effective and adequate appeal within the State’s
legal system.
155. That there is a difference in the purposes served by this principle was recognized by
the Iran-United States Claims Tribunal in Oil Fields of Texas 12 Iran-US CTR 308 at
318-319. The question there was whether a judicial decision could amount to a
measure of appropriation. The decision was that of the Islamic Court of Ahwaz,
which appears to have been a lower court. The Tribunal held that the order of the
Court amounted to a permanent deprivation of use. The Tribunal said (at p 319):
“In these circumstances, and taking into account the Claimant’s
impossibility to challenge the Court order in Iran, there was a taking of the
three blowout preventers for which the Government is responsible” (p
319).
156. The purpose of the requirement that a decision of a lower court be challenged through
the judicial process before the State is responsible for a breach of international law
constituted by judicial decision is to afford the State the opportunity of redressing
through its legal system the inchoate breach of international law occasioned by the
lower court decision. The requirement has application to breaches of Articles 1102
and 1110 as well as Article 1105.
157. The questions whether there was an adequate and effective municipal remedy
available to Loewen and whether Loewen took sufficient steps to pursue such a
remedy are questions which remain to be considered. It is convenient, first, however,
to deal with Article 1121 and the problem of waiver.
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XXIII. ARTICLE 1121 AND WAIVER
158. In para. 71 of the Decision of January 5, 2001, the Tribunal expressed the view that
“the rule of judicial finality is no different from the local remedies rule. Its purpose is
to ensure that the State where the violation occurred should have an opportunity to
redress it by its own means, within the framework of its own judicial system”.
159. This statement requires qualification in light of the preceding discussion of Article
1105, denial of justice and the local remedies rule. The requirement that a decision of
a lower court be challenged through the judicial process before the State is
responsible for a breach of international law constituted by judicial decision means
that this requirement and the local remedies rule, though they may be similar in
content, serve two different purposes.
160. An important principle of international law should not be held to have been tacitly
dispensed with by international agreement, in the absence of words making clear an
intention to do so (Elettronica Sicula SpA (ELSI) United States v Italy (1989) ICJ 15
at 42). Such an intention may be exhibited by express provisions which are at
variance with the continued operation of the relevant principle of international law.
161. Although the precise purpose of NAFTA Article 1121 is not altogether clear, it
requires a waiver of domestic proceedings as a condition of making a claim to a
NAFTA tribunal. Professor Greenwood and Sir Robert Jennings agree that Article
1121 “is not about the local remedies rule”. One thing is, however, reasonably clear
about Article 1121 and that is that it says nothing expressly about the requirement
that, in the context of a judicial violation of international law, the judicial process be
continued to the highest level.
162. Nor is there any basis for implying any dispensation of that requirement. It would be
strange indeed if sub silentio the international rule were to be swept away. And it
would be very strange if a State were to be confronted with liability for a breach of
international law committed by its magistrate or low-ranking judicial officer when
domestic avenues of appeal are not pursued, let alone exhausted. If Article 1121 were
to have that effect, it would encourage resort to NAFTA tribunals rather than resort to
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the appellate courts and review processes of the host State, an outcome which would
seem surprising, having regard to the sophisticated legal systems of the NAFTA
Parties. Such an outcome would have the effect of making a State potentially liable
for NAFTA violations when domestic appeal or review, if pursued, might have
avoided any liability on the part of the State. Further, it is unlikely that the Parties to
NAFTA would have wished to encourage recourse to NAFTA arbitration at the
expense of domestic appeal or review when, in the general run of cases, domestic
appeal or review would offer more wide-ranging review as they are not confined to
breaches of international law.
163. Article 1121 may have consequences where a claimant complains of a violation of
international law not constituted by a judicial act. That is not a matter which arises
here.
164. For the reasons given, Article 1121 involves no waiver of the duty to pursue local
remedies in its application to a breach of international law constituted by a judicial
act.
XXIV. THE SCOPE AND CONTENT OF THE OBLIGATION TO PURSUE LOCAL
REMEDIES
165. The question then is as to the scope and content of the obligation to pursue local
remedies in a case in which the alleged violation of international law is founded upon
a judicial act. In such a case the pursuit of local remedies plays a part in creating the
ground of complaint that there has been a breach of international law. There is a body
of opinion which supports the view that the complainant is bound to exhaust any
remedy which is adequate and effective (The Finnish Ships Arbitration Award, May
9, 1934, 3 RIAA, 1480 at 1495; Nielsen v Denmark [1958-1959] Yearbook of the
European Commission on Human Rights, 412 at 436, 438, 440, 444) so long as the
remedy is not “obviously futile” (The Finnish Ships Arbitration Award at 1503-1505).
166. On the other hand, the requirement has been described as one “which is not a purely
technical or rigid rule” and one “which international tribunals have applied with a
considerable degree of elasticity” (Norwegian Loans Case (1957) ICJR 9 at 39 per
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Lauterpacht J). In conformity with this approach, one commentator has suggested
that the result in any particular case will depend upon a balancing of factors. So in a
case where it is highly unlikely that resort to further remedies will be favourable to a
claimant, the correct conclusion may be that local remedies have been exhausted “if
the cost involved in the proceeding further considerably outweighs the possibility of
any satisfaction resulting”' (Mummery, “The Content of the Duty to Exhaust Local
Remedies” (1964) 58 Am. Jo. Intl. Law 389 at 401). The same commentator favours
formulation of the issue in terms of whether the local remedy “may reasonably be
regarded as incapable of producing satisfactory reparation” (ibid). Although this
formulation appears to be directed to a case in which the claim is based on an
antecedent breach of international law, the formulation is equally appropriate to
obtaining redress as to producing reparation.
167. Here, however, the question concerns the availability of the remedy rather than its
adequacy or even its effectiveness. At least that is true of the appeal to the
Mississippi Supreme Court. It was an adequate and fully effective appeal. The
obligation of the claimant, who complains that a judicial act is a violation of
international law, to afford the host State the opportunity of remedying the default in
the court below, by taking the matter to a higher court, is subject to reasonable
practical limitations. Thus, Sohn and Baxter, “Convention on the International
Responsibility of States for Injuries to Aliens”, 12th Draft (1961) 168 in their
commentary on Article 19, sub-paragraph 2(b), state:
“The subparagraph is intended to preclude a respondent State from
maintaining that a local remedy exists when in fact resort to that remedy is
a practical impossibility and to permit a claimant to introduce evidence of
the practical workings of justice, as distinct from the theoretical state of
the law as reflected in code, statute, decision and learned writing. (…) It
may be that an alien in fact finds it difficult to employ an existing local
remedy by reason of the existence of some other procedural barrier in the
law, such as a requirement of posting excessive security for costs, or
where the law leaves to the discretion of a court official the amount of
security for costs to be posted, an order for the posting of a prohibitive
amount (…). Since the purpose of the Article as a whole is to require
exhaustion of a remedy only if it is reasonably available, it is important to
provide not only for the case where a remedy is unavailable as a matter of
law, but also for the case where a theoretically available remedy cannot in
fact be utilized.”
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168. This passage, in our view, correctly expresses the scope and content of the principle
relating to exhaustion of local remedies. It is an obligation to exhaust remedies which
are effective and adequate and are reasonably available to the complainant in the
circumstances in which it is situated.
169. Availability is not a standard to be determined or applied in the abstract. It means
reasonably available to the complainant in the light of its situation, including its
financial and economic circumstances as a foreign investor, as they are affected by
any conditions relating to the exercise of any local remedy.
170. If a State attaches conditions to a right of appeal which render exercise of the right
impractical, the exercise of the right is neither available nor effective nor adequate.
Likewise, if a State burdens the exercise of the right directly or indirectly so as to
expose the complainant to severe financial consequences, it may well be that the State
has by its own actions disabled the complainant from affording the State the
opportunity of redressing the matter of complaint. The scope of the need to exhaust
local remedies must be considered in the light of these considerations.
171. Whether it has been satisfied in this case depends upon an examination of events
subsequent to the trial, events to which we now turn.
XXV. LOEWEN’S APPEAL, THE COURT DECISIONS ON THE BONDING
REQUIREMENT AND THE SETTLEMENT AGREEMENT
172. On November 5, 1995, Loewen’s counsel set out a timetable for future procedures.
They proposed an appeal to the Supreme Court of Mississippi which was expected to
take six months to two years before it was finalized. Loewen’s counsel contemplated
an appeal to the United States District Court, if necessary.
173. On November 6, 1995, final judgment was entered in favour of O’Keefe. On that
day, Marsh & McLellan, a firm experienced in placing supersedeas bonds in appeals
in civil lawsuits, began to assemble a package of parties willing to furnish a bond. By
November 22, 1995, it was arranged that surety companies would underwrite a total
of $625,000,000, this being the amount of the bond required by Miss. R. App. P.8(a).
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By posting a bond in that amount, Loewen would have prevented O’Keefe from
enforcing the judgment while Loewen’s appeal was pending.
174. By about November 20, 1995, it became clear that the sureties would all require that
100% of their risk be supported by collateral in the form of bank letters of credit and
that Loewen’s bankers would not promise such letters. On November 25, Loewen
filed an affidavit stating that it was unable to provide an appeal bond with supersedeas
in the amount, form and conditions required by the Mississippi Supreme Court and
the surety companies.
175. Meantime, immediately after judgment was entered, O’Keefe began to enrol it within
the counties of Mississippi, enrolment being a condition precedent to execution.
176. On November 15, 1995, Loewen moved for judgment notwithstanding the verdict,
and/or for a new trial and for remittitur. In these motions Loewen advanced
numerous grounds, including grounds discussed in this Award, for challenging the
verdict both as to liability and as to the damages awarded (compensatory and
punitive). On the following day Loewen filed motions seeking a reduction of the
compensatory and punitive damages awarded.
177. On November 20, 1995, the motions came on for hearing before Judge Graves. The
court announced that each side would be given fifteen minutes for argument and
Loewen would be allowed a further ten minutes for rebuttal. After argument, the
court denied all six Loewen motions, without giving reasons.
178. On the same day, Mr Gary was reported as saying “They have ten days to post the
cash bond. If they don’t, my client will proceed to take over their assets. That’s
every funeral home they own, every insurance company, every cemetery, their
corporate jet and their yacht”. On November 21, 1995, Loewen’s lawyers sought an
assurance from O’Keefe’s lawyers that they would not seek enforcement during the
thirty day period for perfecting the appeal. The assurance was not forthcoming.
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179. On November 27, 1995, Loewen filed an appeal of the trial court judgment with the
Mississippi Supreme Court. Under Mississippi law, a party may pursue such an
appeal without posting a bond.
180. On November 28, 1995, Loewen filed a motion asking the trial court to stay
enforcement of its judgment on Loewen filing a conventional supersedeas bond in the
penal sum of $125,000,000 and providing covenants that Loewen would maintain its
financial strength and net worth. By this motion Loewen asked the trial court to
reduce the bond to $125,000,000 – 125 per cent of the compensatory damages
component of the judgment. The Mississippi Court Rules empower the court, for
“good cause shown” and in an “appropriate” case, to grant a stay of enforcement upon
a bond or upon conditions less than or other than a bond in an amount of 125 per cent
of the judgment (Miss. R. App. P. Rule 8(b)). Loewen argued that security for the
compensatory damages component was all that O’Keefe was entitled to, that Loewen
was unable to provide more than a bond for $125,000,000 at the time, (though
claiming it had the financial ability to satisfy the judgment to make for punitive
damages), that its net worth was sufficient to make the judgment fully collectible.
Loewen also argued that denial of the stay would cause it and innocent third parties
irreparable harm and deprive it of appellate review. Loewen further argued that the
appeal had strong prospects of success, in particular that the damages were grossly
excessive. Loewen also stated that its major credit agreements all had cross-default
clauses and agreed that an uncured default in any of their long term credit agreements
would operate to vacate the stay.
181. On the same day, Loewen filed a motion in seeking a stay pending consideration by
the court of the motion for a stay.
182. On November 29, 1995, the motions for a stay came on for hearing before Judge
Graves in the trial court. The hearing began with Judge Graves again fixing fifteen
minutes for oral argument on each side with ten minutes for rebuttal. In doing so, he
exhibited resentment at statements made by Loewen’s counsel in their brief that they
were “stunned” by the time limits fixed for argument on the earlier motion and about
the “error-infested” trial. A reading of the transcript, however, reveals that Judge
Graves applied himself to the issues. He questioned O’Keefe’s counsel about the
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problem that would arise if execution on the judgment was not stayed and execution
followed, yet on appeal the judgment was set aside or reduced. He asked whether it
might not be more prudent to maintain the status quo. O’Keefe’s counsel responded
that there was no assurance that the status quo could be maintained, that there were
other lawsuits pending against Loewen and the judgments might be bigger than the
O’Keefe judgment. O’Keefe’s counsel also said “they would go into Chapter Eleven
[of the Bankruptcy Code] and in the meantime pursue us” and “[t]hey can appeal
without supersedeas”. Loewen made no response on the Chapter Eleven argument
even though it had that option under consideration. In argument, Judge Graves
discussed other alternatives with Loewen’s counsel and finally asked whether security
could be given in an amount between $125,000,000 and $625,000,000. Nothing came
of this after some discussion between the parties.
183. Judge Graves then delivered judgment on the motions, dismissing them. He accepted
that the court had a discretion under Rule 8(b) to reduce the amount of the bond for
“good cause shown”, an expression which was not defined. However, Judge Graves
considered, in the light of the Mississippi Supreme Court decision in In re Estate of
Taylor 539 So 2d 1029, that the general purpose of a supersedeas bond was to give
absolute security to the party affected by the appeal and that the security was to cover
the entire verdict, including the amount of punitive damages. Judge Graves
concluded that, although it was arguable that a stay would not result in harm to
O’Keefe,
“the Court has no reason to believe that there are assets [of Loewen] in
this case which would not dissipate or that the same assets which are
subject to levy right now would still be there and subject to levy a year
from now or eighteen months from now if there were an appeal allowed
without the bond”.
In reaching this conclusion, Judge Graves referred to matters relied upon by
O’Keefe’s counsel – the financial inability of Loewen to obtain the bond, the
pendency of other lawsuits, that investors were looking to get out and that the price of
the shares had plummeted. The critical finding in the judgment was:
“The Court … finds that there exists no viable alternative for securing this
Plaintiff’s interest absent the requirement of a [$625 million] bond
pursuant to Rule 8.”
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184. Judge Graves stressed that the Rule required that the amount of the bond was to give
absolute security to the party affected by the appeal. If one accepts this interpretation
of the Rules, and Judge Graves was bound by the interpretation, his decision did not
reflect an error in principle. Further he took into consideration the various factors
relied upon by the parties and, after weighing them, came up with a decision in favour
of O’Keefe.
185. It is not a decision which we would have reached on the materials before Judge
Graves. That is because we would not read the Rules as having the purpose of
securing absolute security for the verdict awarded, more particularly when (a) there
was a strong case for regarding the verdict as excessive and one which should be set
aside, (b) the provision of absolute security was beyond the capacity of the appellant
and (c) the prosecution of an appeal without a stay would work an injustice and in all
probability foreclose the possibility of an appeal, eventualities rendered the more
likely by the sheer size of the bond stipulated by Rule 8(a).
186. We repeat what we said earlier, that Claimants make no challenge to the bonding
requirement in Rule 8(a) notwithstanding the potential harshness of its operation.
That operation constitutes a very good reason for interpreting the discretion conferred
by Rule 8(b) more liberally than it was construed by the Mississippi courts.
187. After this case, the Mississippi Supreme Court made changes to its Rules, in
particular Rule 8, which would preclude what happened before Judge Graves, and
later what happened on appeal. The changes acknowledge that Rule 8 could operate
in an extreme way so as to produce an unjust result. But the challenge here is not to
Rule 8(a); it is to the way Rule 8 was applied.
188. It was common ground between the parties that there is no principle of international
law which requires a State to provide a right of appeal from a decision of its courts.
Here the refusal to relax the bonding requirement was not a denial of the appeal.
Loewen, at least in theory, could proceed with its appeal, albeit subject to the risk of
execution, if it did not pursue the Chapter Eleven Bankruptcy option.
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189. Claimants submit that the decisions refusing to relax the bonding requirements were a
violation of Article 1105, because there was a procedural denial of justice, there was a
denial of fair and equitable treatment and a denial of full protection and security.
Notwithstanding the criticisms already made of Judge Graves’ decision, that decision
does not transgress the minimum standard of treatment mandated by Article 1105. It
was at worst an erroneous or mistaken decision.
190. On November 30, 1995, the Supreme Court of Mississippi granted an interim stay of
execution on the judgment, conditional on the posting of a bond in the sum of
$125,000,000. On December 20, 1995, the Supreme Court extended the stay
indefinitely, pending further order of the court.
191. At this time Loewen was considering raising further capital by way of equity and
debt. Loewen’s lawyers were examining the effect of an equity, raising on the court’s
appreciation of its ability to post a $625,000,000 bond.
192. On December 12, 1995, Loewen filed in the Mississippi Supreme Court an addendum
to their motion for a stay, informing the court of their intention to file a preliminary
prospectus for an offering of preferred securities to the public in Canada. The
proceeds of the offering would be deposited with a trustee for the funding of
acquisitions of funeral homes, cemeteries and related businesses. Although not
available to fund a supersedeas bond, the use of the funds for acquisitions would
benefit O’Keefe by increasing Loewen’s underlying value.
193. While the appeal to the Mississippi Supreme Court was pending Loewen issued new
stock in the Canadian equity market to fund new acquisitions and was preparing to
raise an additional $200 million in a debt offering.
194. On December 17, 1995, Raymond Loewen and others conducted a conference call
with financial institutions in Canada concerning an offer of some $200 million
convertible preferred shares. In response to questions, Raymond Loewen stated that
“… the Supreme Court in Mississippi has already given us one stay, and
we are now waiting for the permanent stay, and the permanent reduction
of the bond, and there is every reason to believe that in fact we will get
that. In addition to that, our company we believe is – we are quite
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confident that with our banks and with our investment bankers we will be
able to deal with the very worst case scenario”.
And, in response to a question about the punitive damages owed Raymond Loewen
said:
“Obviously, we don’t think that a 500 million liquidity thing will ever
come, but being a responsible corporation we have the contingency plan
for every possible contingency, and we’ve looked at that, discussed it with
our bankers, and we have a plan which we believe would address that
without any major long-term harm on liquidity after a brief to adjust that.”
195. On January 23, 1996, Loewen’s lawyers pointed out the tactical dangers of raising
money to fund the existing acquisition obligations, but not the bond. They noted that
Loewen’s Mississippi counsel thought that this course would result in loss of
credibility and could result in loss of the stay. The current settlement strategy advised
by the lawyers was to get Loewen to the point where it could post the $625 million,
ask the Court to be relieved of that burden and point out to O’Keefe the need for them
to settle before the court acted or the bond was posted.
196. On January 24, 1996, the Supreme Court of Mississippi with two dissentients
dismissed defendants’ motion for stay of execution, and ordered that the interim stay
entered on November 30 and extended on December 20, 1995 be dissolved with
effect from 1200 pm on January 31, 1996. The Court did not give reasons for its
decision. The Court’s formal order simply recited:
“The Court finds that the question before it is whether the trial court
abused its discretion in refusing to lower the amount of the supersedeas
bond at Appellants’ request. The Court finds no abuse of discretion in the
trial court’s refusal to lower the amount of the supersedeas bond, and that
the trial court properly followed M.R.A.P.8.”
197. Whether the Supreme Court’s ruling on this point was appropriate or not, it stands in
the same position as Judge Graves’ decision under appeal. The Supreme Court's
ruling did not transgress the minimum standard of treatment under Article 1105.
198. On January 25, 1996, a memorandum was circulated within the Loewen Group
reporting the decision of the Mississippi Supreme Court, and informing readers that
the Group was currently pursuing three alternative avenues:
(1) securing funds to finance the bond;
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(2) negotiating a reasonable settlement;
(3) filing for Chapter Eleven Bankruptcy protection without posting a bond.
Chapter Eleven was considered to be by far the least desirable but would be utilised if
absolutely necessary.
199. On January 25, 1996, plaintiffs’ lawyers wrote to defendants’ lawyers advising that
they would start execution on all Loewen’s property in Mississippi and other states at
noon on January 31, adding:
“… we are willing to give you a second chance to resolve this case and
avoid bankruptcy. However, I am renewing my offer to resolve this case
for four hundred and seventy-five million dollars”.
Respondent suggests that Loewen would have discounted O’Keefe’s threats to levy
execution on the judgment because O’Keefe would have been deterred by the
potential liability for damages it would face if, ultimately, the judgment was set aside.
In our view, Loewen was entitled to treat the threat of prompt execution on some of
its assets in Mississippi as real and as having adverse consequences for market
perceptions of Loewen.
200. On January 27 and 28, 1996, Loewen’s lawyers were drafting and redrafting an
application to the Hon Justice Scalia, as Circuit Justice for the Fifth Circuit, for a stay
of execution pending the filing of a petition for writ of certiorari. The petition invited
the court to take up a question unresolved in Pennzoil v Texaco, Inc. 481 U.S.1 (1987)
whether it comports with due process of law to condition a stay on execution on the
posting of a bond that serves no purpose where the defendant cannot obtain such a
bond, and where the defendant’s inability to post the bond could result in severe,
irreparable harm before the defendant has the chance to obtain appellate review.
201. During the night of January 27/28, 1996, an informal agreement was reached and
recorded, in a handwritten document, which was not signed formally until February 1,
1996. On January 29, 1996, Loewen announced the settlement in a press release:
“We are confident of a successful appeal, but it would have meant several
years of financial uncertainty at significant cost to the Company … After
analysing the financial and other alternatives we determined that, at this
time, a settlement is in the best interests of the Company and its
shareholders.”
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202. On February 1, 1996, the formal settlement agreement was executed. On the same
day the parties executed an Absolute Release with Indemnity Agreement and
Covenants.
203. On February 2, 1996, on the joint motion of all parties, the Supreme Court of
Mississippi dismissed Loewen’s appeal with prejudice, revesting the Circuit Court
with jurisdiction to consummate a release, settlement and dismissal of the suit on the
terms described in the parties’ joint motion to dismiss. The order of January 24, 1996
was vacated and dissolved, nunc pro tunc, so that the amount of the required bond
reverted to $125 million. The order was conditional on the performance of the
monetary part of the agreed settlement.
204. On February 2, 1996, Judge Graves ordered:
(i) that the bond be released and discharged; and
(ii) that (subject to performance of the settlement agreement) the judgment
of 6 November 1996 was satisfied and cancelled.
XXVI. DOES THE SETTLEMENT AGREEMENT OPERATE TO RELEASE ALL
CLAIMS AGAINST RESPONDENT?
205. It is convenient to deal here with an argument based on a release of claims provided
for by the settlement agreement. Respondent submitted that, on its true construction,
the settlement agreement operated to release all claims by Loewen, including the
NAFTA claims in issue in this arbitration, against Respondent, notwithstanding that
Respondent is not a party to the agreement. The argument is based on the release
executed by Loewen which forms part and is exhibited as “Exhibit C” to the
settlement agreement. The release is a release by Loewen of all claims whatsoever
that Loewen may have against the O’Keefe interests and persons affiliated with the
O’Keefe interests. The release incorporates the accord and satisfaction of “all claims
and causes of action as against the Releases and all other persons, firms, and/or
corporations having any liability in the premises”. The instrument further provides
that the release extends and applies to future claims. The release is expressed to be
governed by the law of Mississippi.
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206. Respondent relies on the “intent” rule of construction in force in Mississippi.
Respondent’s argument is that, according to this rule in determining whether a person
falls within the class of persons intended to take the benefit of a release, a relevant
factor to be taken into account is that the person is not a stranger to the agreement and
has given consideration. Respondent submits that the State of Mississippi was not a
stranger and gave consideration in that it dismissed the appeal and made judicial
orders as requested by the parties. The answer to Respondent’s submission is that
when the settlement agreement and the release are read in their entirety and in
context, we do not regard them as releasing Loewen’s NAFTA claims. They lie
outside the ambit of the claims dealt with.
XXVII. DID LOEWEN PURSUE AVAILABLE LOCAL REMEDIES?
207. In the light of the conclusions reached in para 156, the next question is whether the
appeal to the Mississippi Supreme Court was an available remedy which Loewen
should have pursued before it could establish that the verdict and judgment at trial
constituted a measure “adopted or maintained” by Respondent amounting to a
violation of Art. 1105. Respondent argues that confronted with the adverse bonding
decision by the Mississippi Supreme Court, Loewen should have (i) pursued its
appeal despite the risk of execution on its assets; or (ii) sought protection under
Chapter Eleven of the Bankruptcy Code which would have resulted in a stay of
execution against Loewen’s assets; or (iii) filed a petition for certiorari and sought a
stay of execution in the Supreme Court of the United States.
208. The first alternative suggested by Respondent raises the question whether the appeal
is “a reasonably available remedy”, having regard to the risk of execution against
Loewen’s assets if the bond was not posted. Here, the bonding requirement is
attached, not to the right of appeal, but to the stay of execution. Granted the
distinction, the practical impact of the requirement had severe consequences for
Loewen’s right of appeal. Without posting the bond, Loewen’s right of appeal could
be exercised only at the risk of sustaining immediate execution on Loewen’s assets in
Mississippi, to be followed by execution against Loewen’s assets in other States, with
the inevitable consequence that Loewen’s share price would collapse. In this respect,
we reject Respondent’s contention that the risk of execution was remote and
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theoretical. It is possible that O’Keefe may have exercised some restraint in relation
to execution lest it might ultimately lose the appeal and suffer financial consequences
by reason of executions which could not be justified. But this possibility does not
persuade us that the risk of immediate execution was other than real. In these
circumstances, if exercising the right of appeal, at the risk of immediate execution on
Loewen’s Mississippi assets, was the only alternative available to Loewen, it would
not have been, “a reasonably available remedy” to Loewen.
209. Filing under Chapter Eleven of the Bankruptcy Code would have resulted in a stay of
execution. In this respect, Chapter Eleven would have enabled Loewen’s appeal to
proceed without generating all the consequences that would have flowed from
execution. Chapter Eleven results in re-organization not in liquidation, so that a
company can continue to conduct its business under Court supervision. Although
Court supervision would not necessarily bring to an end Loewen’s acquisitions
program, Court supervision could be expected to restrict and moderate the program.
Quite apart from that consequence, a Chapter Eleven filing may have had an effect on
the public market perception of Loewen with a detrimental impact on its share price.
The question then is whether, in these circumstances, the need to pursue local
remedies extends to requiring a claimant to file under Chapter Eleven in order to
ensure that a right of appeal remains effective and reasonably available. No doubt
there are some situations in which it would be reasonable to expect an impecunious
claimant to file under Chapter Eleven in order to exercise an available right of appeal.
Whether it was reasonable to expect Loewen to file under Chapter Eleven depends at
least in part on the reasons why Loewen elected to enter into the settlement agreement
in preference to exercising other options, a matter examined in paras. 214-216
(inclusive).
210. The third alternative is the petition for certiorari coupled with the application for a
stay. There is a conflict of opinion about the prospects of success of such an
application between Professor Drew S. Days III (former United States Solicitor-
General) and Professor Tribe. Professor Days is of the opinion that Loewen would
have had “a reasonable opportunity” of obtaining review by the Supreme Court of the
United States of the application of the Mississippi bonding requirement on the ground
that it prevented, inconsistently with due process, appellate review of the Mississippi
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trial court judgment. Professor Tribe is of a contrary opinion. He bases his opinion
on a number of grounds. First, the case was fact-intensive and the Court is very
unlikely to review a fact-intensive case. Secondly, there was a dispute between the
parties as to whether the bonding requirement precluded judicial review of the
judgment. The Mississippi Supreme Court did not make such a finding and did not
adopt Loewen’s version of the facts. Thirdly, the presence of a substantial punitive
damages award was irrelevant to the issues which the Supreme Court would have
been called upon to decide.
211. This Tribunal is not in a position to decide whether the opinion of Professor Days or
that of Professor Tribe is to be preferred. Nor is the Tribunal in a position to decide
which of their conflicting opinions is to be preferred on a related question, namely
whether collateral review was available in the Federal District Court. But the
Tribunal notes that Professor Days does not assert that either the Supreme Court or
the Federal Court would grant the relief suggested. It is fair to say that, on his view,
there was a prospect, at most a reasonable prospect or possibility, of such relief being
granted.
212. The decision not to relax the bonding requirement, an act for which Respondent is
responsible in international law, generated the risk of immediate execution with its
attendant detrimental consequences for Loewen. In this situation, was either the
certiorari petition or the collateral review option a reasonably available and adequate
remedy? The pursuit of either remedy, more particularly the Supreme Court remedy,
if it resulted in a failure to obtain a stay, would worsen Loewen’s position and
reinforce adverse market perceptions about Loewen. So, the absence of any certainty
about the outcome of either option is a significant consideration in deciding whether
either option involved an adequate remedy which was reasonably available to
Loewen.
213. Entry into the settlement agreement no doubt reflected a business judgment by
Loewen that, of the various options then open, settlement was the most attractive, in
all probability because it provided certainty. Other alternatives involved financial
consequences which would not have been easy to predict.
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214. Respondent argues that, because entry into the settlement agreement was a matter of
business judgment, Loewen voluntarily decided not to pursue its local remedies. That
submission does not dispose of the point. The question is whether the remedies in
question were reasonably available and adequate. If they were not, it is not to the
point that Loewen entered into the settlement, even as a matter of business judgment.
It may be that the business judgment was inevitable or the natural outcome of adverse
consequences generated by the impugned court decision.
215. Here we encounter the central difficulty in Loewen’s case. Loewen failed to present
evidence disclosing its reasons for entering into the settlement agreement in
preference to pursuing other options, in particular the Supreme Court option which it
had under active consideration and preparation until the settlement agreement was
reached. It is a matter on which the onus of proof rested with Loewen. It is, however,
not just a matter of onus of proof. If, in all the circumstances, entry into the
settlement agreement was the only course which Loewen could reasonably be
expected to take, that would be enough to justify an inference or conclusion that
Loewen had no reasonably available and adequate remedy.
216. Although entry into the settlement agreement may well have been a reasonable course
for Loewen to take, we are simply left to speculate on the reasons which led to the
decision to adopt that course rather than to pursue other options. It is not a case in
which it can be said that it was the only course which Loewen could reasonably be
expected to take.
217. Accordingly, our conclusion is that Loewen failed to pursue its domestic remedies,
notably the Supreme Court option and that, in consequence, Loewen has not shown a
violation of customary international law and a violation of NAFTA for which
Respondent is responsible.
XXVIII. A PRIVATE AGREEMENT IS NOT A GOVERNMENT MEASURE WITHIN
THE SCOPE OF NAFTA CHAPTER ELEVEN
218. Respondent argues that a private agreement to settle litigation out of court is not a
“government measure” within the scope of NAFTA Chapter Eleven (ground 3 of
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62
Respondent’s objection to competence and jurisdiction). The argument may well be
correct as a general proposition. But the Claimants’ case rests on the judgment and
judicial orders made by the Mississippi trial court and the Mississippi Supreme Court.
Claimants’ case is that these judicial acts are the relevant government measures
within NAFTA Chapter Eleven, not that the settlement is such a measure. This
ground of objection is overruled.
XXIX. THE JURISDICTIONAL OBJECTION TO MR RAYMOND LOEWEN’S
CLAIMS
219. This objection is dealt with together with the Respondent’s additional objection to
competence and jurisdiction.
XXX. RESPONDENT’S ADDITIONAL OBJECTION TO COMPETENCE AND
JURISDICTION
220. Subsequent to the October 2001 hearings on the merits, events occurred which raised
questions about TLGI’s capacity to pursue its NAFTA claims and gave rise to
Respondent filing a further objection to competence and jurisdiction on January 25,
2002. TLGI had filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code, and a reorganization plan was approved by the bankruptcy
courts of the United States and Canada. Under that plan, TLGI ceased to exist as a
business entity. All of its business operations were reorganized as a United States
corporation. In apparent recognition of the obvious problem that would be caused by
a United States entity pursuing a claim against the United States under NAFTA,
TLGI, immediately prior to its going out of business, assigned all of its right, title and
interest to the NAFTA claim to a newly created corporation (discreetly called
Nafcanco - a play on the words NAFTA and Canada). It would appear that the
NAFTA claim is the only asset of Nafcanco, and the pursuit of the claim its only
business.
221. Following the filing of Respondent’s objection, appropriate pleadings were filed by
both sides and on June 6, 2002, the Tribunal held a hearing on the objection. Canada
and Mexico again submitted their views on the issues that were raised at the hearing.
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63
222. NAFTA is a treaty intending to promote trade and investment between Canada,
Mexico and the United States. Since most international investment occurs in the
private sector, investment treaties frequently seek to provide some kind of protection
for persons engaging in such investment. Until fairly recently, such protection was
implemented and pursued by the States themselves. When Mexico expropriated the
investment of some American oil companies many years ago, the claims of the
American companies were pursued by American diplomatic authorities. When the
United States seized the assets of Iranian nationals during the hostage crisis of the
1970s, Iran and the United States worked out a settlement as sovereign nations.
223. Chapter Eleven of NAFTA represents a progressive development in international law
whereby the individual investor may make a claim on its own behalf and submit the
claim to international arbitration, as TLGI has done in the instant case. The format of
NAFTA is clearly intended to protect the investors of one Contracting Party against
unfair practices occurring in one of the other Contracting Parties. It was not intended
to and could not affect the rights of American investors in relation to practices of the
United States that adversely affect such American investors. Claims of that nature
can only be pursued under domestic law and it is inconceivable that sovereign nations
would negotiate treaties to supplement or modify domestic law as it applies to their
own residents. Such a collateral effect on the domestic laws of the NAFTA Parties
was clearly not within their contemplation when the treaty was negotiated.
224. If NAFTA could be used to assert the rights of an American investor in the instant
case, it would in effect create a collateral appeal from the decision of the Mississippi
courts, by definition a unit of the United States government. As was pointed out
earlier, the object of NAFTA is to protect outsiders who do not have access to the
political or other avenues by which to seek relief from nefarious practices of
governmental units.
225. Claimant TLGI urges that since it had the requisite nationality at the time the claim
arose, and, antedate the time that the claim was submitted, it is of no consequence that
the present real party in interest - the beneficiary of the claim - is an American citizen.
Both as a matter of historical and current international precedent, this argument must
fail. In international law parlance, there must be continuous national identity from the
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64
date of the events giving rise to the claim, which date is known as the dies a quo,
through the date of the resolution of the claim, which date is known as the dies ad
quem.
226. Claimants’ first argument strand is that NAFTA itself, in Articles 1116 and 1117,
require nationality only to the date of submission. However, those articles deal only
with nationality requirements at the dies a quo, the beginning date of the claim. There
is no language in those articles, or anywhere else in the treaty, which deals with the
question of whether nationality must continue to the time of resolution of the claim.
It is that silence in the Treaty that requires the application of customary international
law to resolve the question of the need for continuous national identity.
227. Nor does the recent arbitral decision in the Mondev case help Claimants in any way.
In that case, the Tribunal dealt with the issue of whether the investment itself had to
remain of the claimant’s identity. Significantly, the reasoning of the Tribunal
implicated other sections of NAFTA, namely Articles 1105 and 1110. The
investment in Mondev, some Boston real estate, had been foreclosed on by an
American mortgage holder. Even though it denied Mondev’s claim on the merits, the
Tribunal appropriately found that the loss of the investment through foreclosure of the
mortgage could not be the basis for denying Mondev’s right to pursue its remedies
under NAFTA. It pointed out that such a set of events could occur quite often to
indenters and that the whole purpose of NAFTA’s protection would be frustrated if
such disputes could not be pursued. It said:
“Secondly the Tribunal would again observe that Article 1105, and even
more so Article 1110, will frequently have to be applied after the
investment in question has failed. In most cases, the dispute submitted to
arbitration will concern precisely the question of responsibility for that
failure. To require the claimant to maintain a continuing status as an
investor under the law of the host State at the time the arbitration is
commenced would tend to frustrate the very purpose of Chapter 11, which
is to provide protection to investors against wrongful conduct including
uncompensated expropriation of their investment and to do so throughout
the lifetime of an investment up to the moment of its "sale or other
disposition" (Article 1101(2)). On that basis, the Tribunal concludes that
NAFTA should be interpreted broadly to cover any legal claims arising
out of the treatment of an investment as defined in Article 1139, whether
or not the investment subsists as such at the time of the treatment which is
complained of. Otherwise issues of the effective protection of investment
at the international level will be overshadowed by technical questions of
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65
the application of local property laws and the classification of local
property interests affected by foreclosure or other action subsequent to the
failure of the investment.”
228. In sum, neither the language of the Treaty, nor any of the cases decided under it
answers the question as to whether continuous nationality is required until the
resolution of the claim. Respondent correctly contends that Article 1131 requires the
Tribunal to decide the issues in dispute in accordance with “applicable rules of
international law”.
229. There is only limited dispute as to the history of the requirement of continuous
nationality to the end of any international proceeding. When investment claims were
negotiated and resolved only at a governmental level, any change in nationality of the
claimant defeated the only reason for the negotiations to continue. The claiming
government no longer had a citizen to protect. This history has changed as the nature
of the claim process has changed. As claimants have been allowed to prosecute
claims in their own right more often, provision has been made for amelioration of the
strict requirement of continuous nationality. But those provisions have been
specifically spelled out in the various treaties that TLGI cites as proof that
international law has changed. Thus, in the claims settlement agreement between Iran
and the United States arising out of the hostage crisis, the requirement of continuous
nationality was specifically altered in the agreement. Many of the bilateral
investment treaties, the so-called “BITs”, contain specific modifications of the
requirement. But such specific provisions in other treaties and agreements only
hinder TLGI’s contentions, since NAFTA has no such specific provision.
230. As with most hoary international rules of law, the requirement of continuous
nationality was grounded in comity. It was not normally the business of one nation to
be interfering into the manner in which another nation handled its internal commerce.
Such interference would be justified only to protect the interests of one of its own
nationals. If that tie were ended, so was the justification. As international law
relaxed to allow aggrieved parties to pursue remedies directly, rather than through
diplomatic channels, the need for a rigid rule of dies ad quem also was relaxed. But
as was previously noted, such relaxations came about specifically in the language of
the treaties. There is no such language in the NAFTA document and there are
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66
substantial reasons why the Tribunal should not stretch the existing language to affect
such a change.
231. We address at this stage an aspect of the problem which might well puzzle a private
lawyer. Such a lawyer would of course be familiar with the inhibitions which can
stand in the way of the enforcement of liabilities when changes in corporate status, or
in the proprietorship of the claims, intervene after the proceedings to enforce the
claim have commenced. Insolvency or judicial administration or a moratorium may
affect one of the parties so that under the relevant domestic law the liability ceases to
be enforceable for a while, or is compulsorily transferred to a third party, or entirely
changes its juristic character, or may become a right to share in the proceedings of a
winding up. Equally, the lawyer would recognise the potential for difficulties in
enforcing a liability after a voluntary transfer to a third party, when the right to pursue
the complaint may be enforceable only by the transferee, or only in the name of the
transferor for the benefit of the transferee; and he could well foresee that particular
difficulties could arise when, under an arbitration agreement between A and B, the
former begins an arbitration, and afterwards transfers the right to C, a stranger to the
arbitration agreement. These are no more than examples. These procedural
difficulties are of a kind which many domestic systems of law have confronted.
232. The same lawyer might well, however, have much more difficulty in visualising the
outcome in the quite different situation where, through subsequent events of the kind
indicated above, a vested claim, already the subject of valid proceedings, simply
ceases to exist, together with the breach of obligation or delict which have brought it
into being. True, it is possible to imagine that a change of identity with a consequent
change of nationality by the enforcing party might deprive a tribunal of territorial
jurisdiction under its domestic rules of procedure. This is not the present case. If the
submissions of the United States are right, the fatal objection to success by the
Claimants is that a NAFTA claim cannot exist or cannot any longer exist, once the
diversity of nationality has come to an end, so that the Tribunal cannot continue with
the resolution of the original dispute, there being no dispute left to resolve. The
private lawyer might well exclaim that the uncovenanted benefit to the defendant
would produce a result so unjust that it could be sustained only by irrefutable logic or
compelling precedent, and neither exists. The spontaneous disappearance of a vested
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67
cause of action must be the rarest of incidents, and no warrant has been shown for it
in the present context.
233. Such a reaction, though understandable, in our opinion, would be, wholly misplaced.
Rights of action under private law arise from personal obligations (albeit they may be
owed by or to a State) brought into existence by domestic law and enforceable
through domestic tribunals and courts. NAFTA claims have a quite different
character, stemming from a corner of public international law in which, by treaty, the
power of States under that law to take international measures for the correction of
wrongs done to its nationals has been replaced by an ad hoc definition of certain kinds
of wrong, coupled with specialist means of compensation. These means are both
distinct from and exclusive of the remedies for wrongful acts under private law: see
Articles 1121, 1131, 2021 and 2022. It is true that some aspects of the resolution of
disputes arising in relation to private international commerce are imported into the
NAFTA system via Article 1120.1(c), and that the handling of disputes within that
system by professionals experienced in the handling of major international
arbitrations has tended in practice to make a NAFTA arbitration look like the more
familiar kind of process. But this apparent resemblance is misleading. The two forms
of process, and the rights which they enforce, have nothing in common. There is no
warrant for transferring rules derived from private law into a field of international law
where claimants are permitted for convenience to enforce what are in origin the rights
of Party states. If the effects of a change of ownership are to be ascertained we must
do so, not by inapt analogies with private law rules, but from the words of Chapter
Eleven, read in the context of the Treaty as a whole, and of the purpose which it sets
out to achieve.
234. TLGI urges some equitable consideration be given because it was the underlying
Mississippi litigation which brought about the need for it to file bankruptcy in the first
place. We have already rehearsed our view of the inequities that befell TLGI in that
litigation, and a chancery court would certainly take such claims into account in
assessing damages. But this is an international tribunal whose jurisdiction stems
from and is limited to the words of the NAFTA treaty. Whatever the reasons for
TLGI’s decision to follow the bankruptcy route it chose, the consequences broke the
chain of nationality that the Treaty requires.
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68
235. Claimants also seek to rely on provisions of the Convention establishing the
International Centre for Settlement of Investment Disputes (ICSID). It claims that
under ICSID, there are different nationality rules that should be applied in this case.
First, it must be noted that neither Canada nor Mexico are signatories of ICSID and it
would be most strange to apply provisions of that Convention to a NAFTA dispute.
The only relevance of ICSID to this proceeding is that the Parties have elected to
function under its structure. That election cannot be used to change or supplement the
substance of the Treaty that the three nations have entered into. Whatever specificity
ICSID has on the requirement of continuous nationality through the resolution of the
dispute only points up the absence of such provisions in NAFTA. Claimants have not
shown that international law has evolved to the position where continuous nationality
to the time of resolution is no longer required.
236. TLGI further contends that the International Law Commission issued a report which
proposed eliminating the continuous nationality rule even in cases of diplomatic
protection, a field that would seem more nationality oriented than the protection of
investors. The report itself met with criticism in many quarters and from many points
of view. In any event, the ILC is far from approving any recodification based on the
report.
237. Article 1109 fully authorizes transfers of property by an investor. TLGI contends that
such provision for free assignment somehow strengthens its position. The assignment
from TLGI to Nafcanco is not being challenged, except as to what is being assigned.
By the terms of the assignment, the only item being assigned was this NAFTA claim.
All of the assets and business of TLGI have been reorganized under the mantle of an
American corporation. All of the benefits of any award would clearly inure to the
American corporation. Such a naked entity as Nafcanco, even with its catchy name,
cannot qualify as a continuing national for the purposes of this proceeding. Claimants
also urge that TLGI remains in existence, since its charter remains in existence. The
Tribunal is being asked to look at form rather than substance to resolve a complicated
claim under an international treaty. Even if TLGI has some kind of ethereal
existence, it sought to place any remaining NAFTA marbles in the Nafcanco ring.
Claimants insist that Respondent is asking the Tribunal to “pierce” the corporate veil
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69
of Nafcanco and point out the legal complications involved in such a piercing. The
Tribunal sees no need to enter into that thicket. The question is whether there is any
remaining Canadian entity capable of pursuing the NAFTA claim.
238. Claimants state that there were good and sufficient business reasons for reorganizing
under an American corporate character including pressure from TLGI’s creditors.
The Tribunal has no reasons to doubt the legitimacy of those reasons but the choices
made clearly had consequences under the Treaty. There might have been equally
compelling reasons for the Loewen interests to choose a United States mantle when it
first commenced doing business. NAFTA does not recognize such business choices
as a substitute for its jurisdictional requirements under its provisions and under
international law.
239. Raymond Loewen argues that his claims under NAFTA survive the reorganization.
Respondent originally objected to Raymond Loewen’s claims on the ground that he
no longer had control over his stock at the commencement of the proceeding. The
Tribunal allowed Raymond Loewen to continue in the proceeding to determine
whether he in fact continued any stock holding in the company. No evidence was
adduced to establish his interest and he certainly was not a party in interest at the time
of the reorganization of TLGI.
240. In regard to the question of costs the Tribunal is of the view that the dispute raised
difficult and novel questions of far-reaching importance for each party, and the
Tribunal therefore makes no award of costs.
ORDERS
For the foregoing reasons the Tribunal unanimously decides -
(1) That it lacks jurisdiction to determine TLGI’s claims under NAFTA
concerning the decisions of United States courts in consequence of TLGI’s
assignment of those claims to a Canadian corporation owned and controlled
by a United States corporation.
(2) That it lacks jurisdiction to determine Raymond L. Loewen’s claims under
NAFTA concerning decisions of the United States courts on the ground that
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70
it was not shown that he owned or controlled directly or indirectly TLGI
when the claims were submitted to arbitration or after TLGI was reorganized
under Chapter 11 of the United States Bankruptcy Code.
(3) TLGI’s claims and Raymond L. Loewen’s are hereby dismissed in their
entirety.
(4) That each party shall bear its own costs, and shall bear equally the expenses
of the Tribunal and the Secretariat.
XXXI. CONCLUSION
241. We think it right to add one final word. A reader following our account of the
injustices which were suffered by Loewen and Mr. Raymond Loewen in the Courts of
Mississippi could well be troubled to find that they emerge from the present long and
costly proceedings with no remedy at all. After all, we have held that judicial wrongs
may in principle be brought home to the State Party under Chapter Eleven, and have
criticised the Mississippi proceedings in the strongest terms. There was unfairness
here towards the foreign investor. Why not use the weapons at hand to put it right?
What clearer case than the present could there be for the ideals of NAFTA to be given
some teeth?
242. This human reaction has been present in our minds throughout but we must be on
guard against allowing it to control our decision. Far from fulfilling the purposes of
NAFTA, an intervention on our part would compromise them by obscuring the crucial
separation between the international obligations of the State under NAFTA, of which
the fair treatment of foreign investors in the judicial sphere is but one aspect, and the
much broader domestic responsibilities of every nation towards litigants of whatever
origin who appear before its national courts. Subject to explicit international
agreement permitting external control or review, these latter responsibilities are for
each individual state to regulate according to its own chosen appreciation of the ends
of justice. As we have sought to make clear, we find nothing in NAFTA to justify the
exercise by this Tribunal of an appellate function parallel to that which belongs to the
courts of the host nation. In the last resort, a failure by that nation to provide adequate
means of remedy may amount to an international wrong but only in the last resort.
The line may be hard to draw, but it is real. Too great a readiness to step from outside
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71
into the domestic arena, attributing the shape of an international wrong to what is
really a local error (however serious), will damage both the integrity of the domestic
judicial system and the viability of NAFTA itself. The natural instinct, when
someone observes a miscarriage of justice, is to step in and try to put it right, but the
interests of the international investing community demand that we must observe the
principles which we have been appointed to apply, and stay our hands.
Done at Washington, D.C.
(signed)
……………….
Sir Anthony Mason
President of the Tribunal
Date: 19.06.03
(signed)
……………………
Judge Abner J. Mikva
Arbitrator
(signed)
……………………
Lord Mustill
Arbitrator
Date: June 25, 2003 Date: 17.06.03
Annex 175
ANNEX 176
Case No. ARB(AF)/99/2
INTERNATIONAL CENTRE FOR
SETTLEMENT OF INVESTMENT DISPUTES
(ADDITIONAL FACILITY)
BETWEEN:
MONDEV INTERNATIONAL LTD.
Claimant
and
UNITED STATES OF AMERICA
Respondent
___________________________
AWARD
___________________________
Before the Arbitral Tribunal
constituted under Chapter Eleven
of the North American Free Trade
Agreement, and comprised of:
Sir Ninian Stephen (President)
Professor James Crawford
Judge Stephen M. Schwebel
Date of dispatch to the parties: October 11, 2002
Annex 176
TABLE OF CONTENTS
paragraph
A. Introduction 1-36
B. The Underlying Dispute 37-40
C. The Tribunal’s Jurisdiction and the Admissibility of the Claim 41-92
1. The arguments of the parties 45-55
2. The Tribunal’s views on the preliminary issues 56-91
(a) The United States objection ratione temporis 57-75
(b) Mondev’s standing under Articles 1116(1) and 1117(1) 76-86
(c) The three year time bar (Articles 1116(2) and 1117(2)) 87
(d) Ownership of the claim and the issue of the mortgage 88-91
3. Conclusion 92
D. The Merits of Mondev’s Article 1105 Claim 93-156
1. The interpretation of Article 1105 94-127
(a) The FTC’s interpretations of 31 July 2001 100-125
(b) The applicable standard of denial of justice 126-127
2. The application of Article 1105(1) to the present case 128-156
(a) The dismissal of LPA’s contract claim against the City 129-134
(b) The SJC’s failure to remand the contract claim 135-136
(c) The SJC’s failure to consider whether it retrospectively
applied a new rule 137-138
(d) BRA’s statutory immunity 139-156
E. Conclusion 157-159
AWARD
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31
3. Conclusion
92. For these reasons, the Tribunal decides that it has jurisdiction over the claim under
Articles 1116 and 1122 to the extent (but only to the extent) that it concerns allegations of
breach of Article 1105(1) by the decisions of the United States courts. To that extent (but
only to that extent) the claim is admissible.
D. The merits of Mondev’s Article 1105 Claim
93. The Tribunal turns to the merits of this claim. In doing so, it will consider first a
number of issues relevant to the interpretation of Article 1105, before turning to the
application of Article 1105 to the facts of the case.
1. The interpretation of Article 1105
94. There was extensive debate before the Tribunal as to the meaning and effect of Article
1105. The debate included such issues as the binding effect and scope of the FTC’s
interpretation of Article 1105, given on 31 July 2001, the origin and meaning of the terms
“fair and equitable treatment” and “full protection and security” occurring in Article 1105(1),
and the extent of the various customary international law duties traditionally conceived as
falling within the rubric of the “minimum standard of treatment” under international law.
95. Article 1105 is entitled “Minimum Standard of Treatment”. It provides as follows:
“(1) Each Party shall accord to investments of investors of another Party
treatment in accordance with international law, including fair and equitable
treatment and full protection and security.
(2) Without prejudice to paragraph 1 and notwithstanding Article 1108(7)(b),
each Party shall accord to investors of another Party, and to investments of
investors of another Party, non-discriminatory treatment with respect to measures it
adopts or maintains relating to losses suffered by investments in its territory owing
to armed conflict or civil strife.
(3) Paragraph 2 does not apply to existing measures relating to subsidies or
grants that would be inconsistent with Article 1102 but for Article 1108(7)(b).”
In the present case only Article 1105(1) is relevant. Article 1105(2) does make it clear,
however, by the phrase “[w]ithout prejudice to paragraph 1”, that Article 1105(1) is not
limited to issues concerning the treatment of investments before the courts of the host State.
This would be clear in any event, since the “minimum standard of treatment” under
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32
international law as applied by arbitral tribunals and in State practice applies to a wide range
of factual situations, whether in peace or in civil strife, and to conduct by a wide range of
State organs or agencies.
96. This is significant in two ways. First, under the system of Chapter 11, it will be a
matter for the investor to decide whether to commence arbitration immediately, with the
concomitant requirement under Article 1121 of a waiver of any further recourse to any local
remedies in the host State, or whether initially to claim damages with respect to the measure
before the local courts. The standard laid down in Article 1105(1) has to be applied in both
situations, i.e., whether or not local remedies have been invoked. Thus under NAFTA it is
not true that the denial of justice rule and the exhaustion of local remedies rule “are
interlocking and inseparable”. 26 Secondly, in the present case, Mondev through LPA did
choose to invoke its remedies before the United States courts. Indeed at the time it did so it
had no NAFTA remedy, since NAFTA was not in force. The Tribunal is thus concerned only
with that aspect of the Article 1105(1) which concerns what is commonly called denial of
justice, that is to say, with the standard of treatment of aliens applicable to decisions of the
host State’s courts or tribunals.
97. In particular, since the Tribunal lacks jurisdiction to pass upon acts of the City or the
BRA that took place before NAFTA came into force, it only needs to consider how Article
1105(1) applies to a case where the measure challenged is that of a local court, here the SJC.
This is to be distinguished from a case where the action challenged is that of another branch
of government and a court has passed upon that action under its internal law (the situation
that would have obtained here if NAFTA had – as it does not have – retrospective effect).
98. In this respect the Respondent initially appeared to argue that Article 1105(1) does not
protect intangible property interests such as those arising following LPA’s exercise of the
Hayward Parcel option. 27 In oral argument, however, the Respondent made clear that “the set
of standards which make up the international law minimum standard, including principles of
full protection and security, apply to investments”.28 In the Tribunal’s view, there can be no
26 Cf. C. Eagleton, The Responsibility of States in International Law (New York University Press, New
York, 1928), p. 113.
27 United States Counter-Memorial, p. 37.
28 Transcript, p. 683.
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33
doubt on the point. Many of the decisions cited by the parties as relevant to the scope of the
standard involved intangible property, including contract claims.29 Moreover it is clear that
the protection afforded by the prohibition against expropriation or equivalent treatment in
Article 1110 can extend to intangible property interests, as it can under customary
international law. In the Tribunal’s view, there is no reason for reading Article 1105(1) any
more narrowly.
99. As to the meaning of Article 1105(1), the principal issues debated between the parties
concerned the effect of the FTC’s interpretations, and in particular, the content of the notion
of denial of justice, which is central to Mondev’s remaining NAFTA claims.
(a) The FTC’s interpretations of 31 July 2001
100. Article 1131 of NAFTA provides that:
“1. A Tribunal established under this Section shall decide the issues in
dispute in accordance with this Agreement and applicable rules of
international law.
2. An interpretation by the Commission of a provision of this Agreement
shall be binding on a Tribunal established under this Section.”
The Commission referred to in Article 1131 is the Free Trade Commission, established
pursuant to Article 2001 of NAFTA. It comprises cabinet-level representatives of NAFTA
Parties or their designees. One of its functions is to “resolve disputes that may arise
regarding [the] interpretation or application” of NAFTA (Article 2001(2)(c)).
101. In pursuance of these provisions, on 31 July 2001 the FTC adopted, among others,
“the following interpretations of Chapter Eleven in order to clarify and reaffirm the meaning
of certain of its provisions”:
“B. Minimum Standard of Treatment in Accordance with International Law
1. Article 1105(1) prescribes the customary international law minimum
standard of treatment of aliens as the minimum standard of treatment to be
afforded to investments of investors of another Party.
29 See, e.g., Shufeldt claim (United States/Guatemala) (1930) 2 RIAA 1081 at 1097; Norwegian
Shipowners’ Claims (1922) 1 RIAA 309 at p. 332; Philips Petroleum Co Iran v. Islamic Republic of Iran (1989)
21 Iran-US CTR 79 at 106 (para. 76);
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34
2. The concepts of ‘fair and equitable treatment’ and ‘full protection and
security’ do not require treatment in addition to or beyond that which is
required by the customary international law minimum standard of treatment of
aliens.
3. A determination that there has been a breach of another provision of
the NAFTA, or of a separate international agreement, does not establish that
there has been a breach of Article 1105(1).”
Copies of the interpretations were forwarded to the Tribunal by the United States on the day
of their issue. Subsequently they were the subject of extended argument both by the
Claimant and the Respondent.
102. The Claimant professed to be “somewhat bewildered” by the interpretations. It
maintained that the Respondent saw fit “to change the meaning of a NAFTA provision in the
middle of the case in which that provision plays a major part” and questioned whether it
could do so in good faith. It contended that the FTC’s decision was “more a matter of
amendment” to the text of NAFTA than an interpretation of it, observing that the
interpretations conflicted with “judicially found meaning of the text” in three NAFTA
arbitration awards. In the view of the Claimant, the 31 July 2001 interpretations added to the
text of Article 1105 by adding the word, “customary”, while treating the terms “fair and
equitable treatment” and “full protection and security” as surplusage. The Claimant found
“astounding” what it saw as the FTC’s view that a violation of a treaty may constitute
treatment in accordance with international law. It submitted that the provisions of Article
1105 for “fair and equitable treatment and full protection and security” could not be read out
of the Treaty by the FTC, and that those provisions governed the treatment that the Parties are
obliged to extend to investors of another Party. Moreover, if those provisions were to be
treated as affording investors no more than the minimum standard provided by customary
international law, that law had to be given its current content, as it has been shaped by the
conclusion of hundreds of bilateral investment treaties, including NAFTA, and by modern
international judgments and arbitral awards.
103. The Respondent maintained that the meaning of Article 1105 had been “conclusively
established” by the FTC’s interpretations of 31 July 2001. These constituted “the definitive
statement of what the Parties intended from the source designated by the Treaty as the
ultimate and most authoritative source of its meaning, the Parties themselves.” The
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35
obligation of Article 1105(1) “was intentionally limited to that pre-existing body of
customary international legal obligations.” Fair and equitable treatment and full protection
and security were accordingly subsumed within the minimum standard. The NAFTA Parties
had adopted the interpretations in view of what they saw as “the misinterpretations” of
Article 1105 by earlier NAFTA tribunals. They did not do so in order to frustrate Mondev’s
arguments, and there was no basis for an allegation that the Respondent had not acted in good
faith or had abused its powers as a member of the FTC in order to improve its position in
pending litigation. In any event, Article 1131 is “one of the rules of the game, a rule
designed just so that the Parties could assure that what they meant by NAFTA’s terms could
be made known whenever there were misinterpretations.” Nor was there ground for the
Claimant’s contention that the 31 July 2001 interpretations constituted an amendment to
NAFTA. In particular, Paragraph B(3) simply emphasized the original intention of NAFTA
Parties not to subject themselves to arbitration of obligations under other international
agreements.
104. As noted already, following the Claimant’s post-hearing submission of the award of
the Pope & Talbot Tribunal on damages,30 both parties as well as Canada and Mexico
submitted post-hearing briefs.
105. In its damages award of 31 May 2002, the Pope & Talbot Tribunal raised the question
whether it was bound by the FTC’s interpretation, in particular in relation to an award already
made. It noted that NAFTA treats issues of interpretation (Article 2001(2)) and amendment
(Article 2202) differently, and concluded that it was for the Tribunal to determine “whether
the FTC’s action can properly be qualified as an ‘interpretation’”. 31 After referring to newly
available travaux préparatoires of Article 1105, it expressed the view that the FTC’s decision
probably amounted to an amendment rather than an interpretation.32 But even if the FTC’s
interpretation bound the Tribunal and had retrospective effect, this did not necessitate a
revision of the Tribunal’s decision on the merits. Article 1105 incorporated an evolutionary
standard, which allowed subsequent practice, including treaty practice, to be taken into
account.33 In any event, even applying Canada’s own version of the Article 1105 standard,
30 Pope & Talbot Inc. v. Canada, Award in respect of Damages, www.naftalaw.org, 31 May 2002.
31 Ibid., para. 24.
32 Ibid., para. 47.
33 Ibid., para. 59.
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36
the conduct complained of would have constituted a breach entitling the claimant to
damages.34
106. In a post-hearing submission of 8 July 2002 in these proceedings, the United States
criticised the Pope & Talbot Tribunal for suggesting that it was not bound by the FTC
interpretation, and it argued that the award merited little consideration. According to the
Respondent, “nothing in the text of NAFTA supports the view that FTC interpretations would
be subject to… review by an ad hoc tribunal constituted under Chapter Eleven”. In any event
the FTC’s interpretation was supported by well-settled principles of treaty interpretation.
Even if it was permissible to refer to the content of other BITs in interpreting Article 1105(1)
(which it denied), the United States had consistently taken the position, for example in
advising the Senate on ratification of BITs, that the “fair and equitable treatment” standard
“was intended to require a minimum standard of treatment based on customary international
law”.35 On the other hand the Pope & Talbot Tribunal had erred in its automatic equation of
customary international law with the content of BITs, without regard to any question of
opinio juris. In particular, the decision of the Chamber in the ELSI case,36 on which the Pope
& Talbot Tribunal relied, concerned a particular FCN treaty. That decision, in the United
States’ view, “cannot reflect an evolution in customary international law… ELSI did not even
purport to address customary international law standards requiring treatment of an alien
amounting to an ‘outrage’ for a finding of a violation. In any event, ELSI clearly does not
establish that any relevant standard under customary international [law] requires mere
‘surprise’.”37
107. In its letter to the Tribunal of 15 July 2002, the Claimant noted that it had not argued
that the FTC’s “Interpretation” should be disregarded; nor did its claims depend on a view of
Article 1105(1) which was contradicted by the FTC. It observed that the formulation of
“arbitrariness” given by the Chamber in the ELSI case had been applied in the context of
34 Ibid., para. 65.
35 Post-Hearing Submis sion of Respondent United States of America on Pope & Talbot, 8 July 2002, p.
11. In support the Respondent attached, by way of example, Letters of Submittal in respect of 11 BITs.
36 ICJ Reports 1989 p. 15 at p. 76, cited by the Pope & Talbot Tribunal at para. 63.
37 Post-Hearing Submission of Respondent United States of America on Pope & Talbot, 8 July 2002, , pp.
16-17.
Annex 176
37
denial of justice by an ICSID Tribunal in Amco Asia.38 In the Claimant’s view it was
incorrect to seek to limit the ELSI dictum to the particular FCN treaty applicable in that case.
108. In its Article 1128 submission of 23 July 2002, Mexico stressed that most of the
problems it saw (in common with the United States) with the Pope & Talbot Tribunal award
concerned obiter dicta, i.e., statements which were not necessary to the decision in that case.
In Mexico’s words “[t]he Pope & Talbot Tribunal created the interpretative problem that it
complained of”, in particular in adopting an “additive” approach to Article 1105(1). Mexico
noted that the customary international law standard “is relative and that conduct which may
not have violated international law [in] the 1920s might very well be seen to offend
internationally accepted principles today”. Mexico agreed with the United States that the
ELSI Tribunal had considered the notion of “arbitrariness” under a specific provision of a
BIT, but also noted that the Chamber’s discussion “is nevertheless instructive as to the
standard of review that the international tribunal must employ when examining whether a
State has violated the international minimum standard”. In its view, the core idea was that
“of arbitrary action being substituted for the rule of law”.
“The key point is that the Chamber accorded deference to the respondent’s
legal system in applying the standard, finding that even though the mayor’s act
of requisitioning the factory at issue in the case was unlawful at Italian law as
an excess of power, mere domestic illegality did not equate to arbitrariness at
international law.”39
109. In its submission of 19 July 2002, Canada likewise denied the capacity of Chapter 11
Tribunal’s to review FTC interpretations, and submitted that, in any event, the FTC
interpretation clearly qualified as such under the standards for interpretation in Article 31 of
the Vienna Convention on the Law of Treaties. As to the substance of the Article 1105
standard, Canada noted that its “position has always been that customary international law
can evolve over time, but that the threshold for finding violation of the minimum standard of
treatment is still high”.40
38 Amco Asia Corp. v. Republic of Indonesia, Resubmitted Case, Award of 31 May 1990, paras. 136-137,
1 ICSID Rep. 569 at 604.
39 Article 1128 Submission of the United Mexican States in the Matter of Mondev International Ltd. v.
United States of America, 23 July 2002, p. 17.
40 Submission of Canada on the Pope & Talbot Award, 19 July 2002, para. 33.
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110. In their post-hearing submissions, all three NAFTA Parties challenged holdings of the
Tribunal in Pope & Talbot which find that the content of contemporary international law
reflects the concordant provisions of many hundreds of bilateral investment treaties. In
particular, attention was drawn to what those three States saw as a failure of the Pope &
Talbot Tribunal to consider a necessary element of the establishment of a rule of customary
international law, namely opinio juris. These States appear to question whether the parties to
the very large numbers of bilateral investment treaties have acted out of a sense of legal
obligation when they include provisions in those treaties such as that for “fair and equitable”
treatment of foreign investment.
111. The question is entirely legitimate. It is often difficult in international practice to
establish at what point obligations accepted in treaties, multilateral or bilateral, come to
condition the content of a rule of customary international law binding on States not party to
those treaties. Yet the United States itself provides an answer to this question, in contending
that, when adopting provisions for fair and equitable treatment and full protection and
security in NAFTA (as well as in other BITs), the intention was to incorporate principles of
customary international law. Whether or not explanations given by a signatory government
to its own legislature in the course of ratification or implementation of a treaty can constitute
part of the travaux préparatoires of the treaty for the purposes of its interpretation, 41 they can
certainly shed light on the purposes and approaches taken to the treaty, and thus can evidence
opinio juris. For example the Canadian Statement on Implementation of NAFTA states that
Article 1105(1) “provides for a minimum absolute standard of treatment, based on longstanding
principles of customary international law”.42 The numerous transmittal statements
by the United States of BITs containing language similar to that of NAFTA show the same
general approach. For example, the transmittal statement with respect to the United States-
Ecuador BIT of 1993 states that the guarantee of fair and equitable treatment “sets out a
minimum standard of treatment based on customary international law”.43 It is to be noted
that these official statements repeatedly refer not to “the” but to “a” minimum standard of
treatment.
41 Cf. Anglo-Iranian Oil Company Case (Preliminary Objections), ICJ Reports 1952 p. 93 at p. 107; Case
concerning Oil Platforms (Islamic Republic of Iran v. United States of America) (Preliminary Objection), ICJ
Reports 1996 p. 803 at p. 814 (para. 29).
42 Canada, Department of External Affairs, North American Free Trade Agreement, Canadian Statement
on Implementation, Canada Gazette, 1 January 1994, p. 68 at p. 149.
43 103d Congress, 1st Session, Treaty Doc. 103-15 (Washington, 1993) p. ix.
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112. More recent transmittal statements are even more explicit. For example the
transmittal statement for the United States-Albania BIT of 1995 states in relevant part:
“Paragraph 3 sets out a minimum standard of treatment based on standards
found in customary international law. The obligations to accord ‘fair and
equitable treatment’ and ‘full protection and security’ are explicitly cited, as is
the Parties’ obligation not to impair through unreasonable and discriminatory
means, the management, conduct, operation, and sale or other disposition of
covered investments. The general reference to international law also
implicitly incorporates other fundamental rules of international law: for
example, that sovereignty may not be grounds for unilateral revocation or
amendment of a Party’s obligations to investors and investments (especially
contracts), and that an investor is entitled to have any expropriation done in
accordance with previous undertakings of a Party.”44
As Mexico noted in its post-hearing submission to the Tribunal, it did not have a practice
prior to NAFTA of concluding BITs, but it expressly associated itself with the Canadian
Statement on Implementation. 45
113. Thus the question is not that of a failure to show opinio juris or to amass sufficient
evidence demonstrating it. The question rather is: what is the content of customary
international law providing for fair and equitable treatment and full protection and security in
investment treaties?
114. It has been suggested, particularly by Canada, that the meaning of those provisions in
customary international law is that laid down by the Claims Commissions of the inter-war
years, notably that of the Mexican Claims Commission in the Neer case. That Commission
laid down a requirement that, for there to be a breach of international law, “the treatment of
an alien ... should amount to an outrage, to bad faith, to wilful neglect of duty, or to an
insufficiency of governmental action so far short of international standards that every
reasonable and impartial man would readily recognize its insufficiency.”46
44 104th Congress, 1st Session, Treaty Doc. 104-15 (Washington, 1995) pp. viii-ix.
45 Article 1128 Submission of the United Mexican States in the Matter of Mondev International Ltd. v.
United States of America, 23 July 2002, pp. 5, 7.
46 U.S.A. (L.F. Neer) v. United Mexican States, decision of the General Claims Commission, United
States-Mexico, 15 October 1926, Opinions of Commissioners, 1927, p. 1, reproduced in the American Journal
of International Law 1927, pp. 555, 556; 3 ILR 213.
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115. The Tribunal would observe, however, that the Neer case, and other similar cases
which were cited, concerned not the treatment of foreign investment as such but the physical
security of the alien. Moreover the specific issue in Neer was that of Mexico’s responsibility
for failure to carry out an effective police investigation into the killing of a United States
citizen by a number of armed men who were not even alleged to be acting under the control
or at the instigation of Mexico. In general, the State is not responsible for the acts of private
parties,47 and only in special circumstances will it become internationally responsible for a
failure in the conduct of the subsequent investigation. Thus there is insufficient cause for
assuming that provisions of bilateral investment treaties, and of NAFTA, while incorporating
the Neer principle in respect of the duty of protection against acts of private parties affecting
the physical security of aliens present on the territory of the State, are confined to the Neer
standard of outrageous treatment where the issue is the treatment of foreign investment by the
State itself.
116. Secondly, Neer and like arbitral awards were decided in the 1920s, when the status of
the individual in international law, and the international protection of foreign investments,
were far less developed than they have since come to be. In particular, both the substantive
and procedural rights of the individual in international law have undergone considerable
development. In the light of these developments it is unconvincing to confine the meaning of
“fair and equitable treatment” and “full protection and security” of foreign investments to
what those terms – had they been current at the time – might have meant in the 1920s when
applied to the physical security of an alien. To the modern eye, what is unfair or inequitable
need not equate with the outrageous or the egregious. In particular, a State may treat foreign
investment unfairly and inequitably without necessarily acting in bad faith.
117. Thirdly, the vast number of bilateral and regional investment treaties (more than
200048) almost uniformly provide for fair and equitable treatment of foreign investments, and
largely provide for full security and protection of investments. Investment treaties run
between North and South, and East and West, and between States in these spheres inter se.
On a remarkably widespread basis, States have repeatedly obliged themselves to accord
47 As stressed by the ILC in its commentary to the Articles on Responsibility of States for Internationally
Wrongful Acts; see Chapter II, para. (3), Article 11, paras. (2)-(3).
48 According to UNCTAD’s World Investment Report 2002, the actual number as at December 2001 was
2099: see www.unctad.org/WIR/pdfs/fullWIR02/pp.1-22.pdf.
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foreign investment such treatment. In the Tribunal’s view, such a body of concordant
practice will necessarily have influenced the content of rules governing the treatment of
foreign investment in current international law. It would be surprising if this practice and the
vast number of provisions it reflects were to be interpreted as meaning no more than the Neer
Tribunal (in a very different context) meant in 1927.
118. When a tribunal is faced with the claim by a foreign investor that the investment has
been unfairly or inequitably treated or not accorded full protection and security, it is bound to
pass upon that claim on the facts and by application of any governing treaty provisions. A
judgment of what is fair and equitable cannot be reached in the abstract; it must depend on
the facts of the particular case. It is part of the essential business of courts and tribunals to
make judgments such as these. In doing so, the general principles referred to in Article
1105(1) and similar provisions must inevitably be interpreted and applied to the particular
facts.
119. That having been said, for the purposes of the present case the Tribunal does not need
to resolve all the issues raised in argument and in the written submissions concerning the
FTC’s interpretation. The United States itself accepted that Article 1105(1) is intended to
provide a real measure of protection of investments, and that having regard to its general
language and to the evolutionary character of international law, it has evolutionary
potential.49 At the same time, Article 1105(1) did not give a NAFTA tribunal an unfettered
discretion to decide for itself, on a subjective basis, what was “fair” or “equitable” in the
circumstances of each particular case. While possessing a power of appreciation, the United
States stressed, the Tribunal is bound by the minimum standard as established in State
practice and in the jurisprudence of arbitral tribunals. It may not simply adopt its own
idiosyncratic standard of what is “fair” or “equitable”, without reference to established
sources of law.
120. The Tribunal has no difficulty in accepting that an arbitral tribunal may not apply its
own idiosyncratic standard in lieu of the standard laid down in Article 1105 (1). In light of
the FTC’s interpretation, and in any event, it is clear that Article 1105 was intended to put at
rest for NAFTA purposes a long-standing and divisive debate about whether any such thing
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as a minimum standard of treatment of investment in international law actually exists.50
Article 1105 resolves this issue in the affirmative for NAFTA Parties. It also makes it clear
that the standard of treatment, including fair and equitable treatment and full protection and
security, is to be found by reference to international law, i.e., by reference to the normal
sources of international law determining the minimum standard of treatment of foreign
investors.
121. To this the FTC has added two clarifications which are relevant for present purposes.
First, it makes it clear that Article 1105(1) refers to a standard existing under customary
international law, and not to standards established by other treaties of the three NAFTA
Parties. There is no difficulty in accepting this as an interpretation of the phrase “in
accordance with international law”. Other treaties potentially concerned have their own
systems of implementation. Chapter 11 arbitration does not even extend to claims concerning
all breaches of NAFTA itself, being limited to breaches of Section A of Chapter 11 and
Articles 1503(2) and 1502(3)(a).51 If there had been an intention to incorporate by reference
extraneous treaty standards in Article 1105 and to make Chapter 11 arbitration applicable to
them, some clear indication of this would have been expected. Moreover the phrase
“Minimum standard of treatment” has historically been understood as a reference to a
minimum standard under customary international law, whatever controversies there may have
been over the content of that standard.
122. Secondly, the FTC interpretation makes it clear that in Article 1105(1) the terms “fair
and equitable treatment” and “full protection and security” are, in the view of the NAFTA
Parties, references to existing elements of the customary international law standard and are
not intended to add novel elements to that standard. The word “including” in paragraph (1)
supports that conclusion. To say that these elements are included in the standard of treatment
under international law suggests that Article 1105 does not intend to supplement or add to
that standard. But it does not follow that the phrase “including fair and equitable treatment
and full protection and security” adds nothing to the meaning of Article 1105(1), nor did the
49 This potential is likewise accepted by A.V. Freeman, The International Responsibility of States for
Denial of Justice (Longmans, London, 1938, reprinted by Kraus, New York, 1970), p. 570.
50 See, e.g., E. Borchard, “The Minimum Standard of Treatment of Aliens”, (1940) Michigan Law
Review 445; A. Roth, The Minimum Standard of International Law as Applied to Aliens (The Hague, Sijthoff,
1949); F.A. Mann, “British Treaties for the Promotion and Protection of Investments”, (1981) 52 BYIL 241, and
works there cited.
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FTC seek to read those words out of the article, a process which would have involved
amendment rather than interpretation. The minimum standard of treatment as applied by
tribunals and in State practice in the period prior to 1994 did precisely focus on elements
calculated to ensure the treatment described in Article 1105(1).
123. A reasonable evolutionary interpretation of Article 1105(1) is consistent both with the
travaux , with normal principles of interpretation and with the fact that, as the Respondent
accepted in argument, the terms “fair and equitable treatment” and “full protection and
security” had their origin in bilateral treaties in the post-war period.52 In these circumstances
the content of the minimum standard today cannot be limited to the content of customary
international law as recognised in arbitral decisions in the 1920s.
124. The Respondent noted that there was some common ground between the parties to the
present arbitration in respect of the FCT’s interpretations, namely, “that the standard adopted
in Article 1105 was that as it existed in 1994, the international standard of treatment, as it had
developed to that time... like all customary international law, the international minimum
standard has evolved and can evolve... the sets of standards which make up the international
law minimum standard, including principles of full protection and security, apply to
investments.”53 Moreover in their written submissions, summarised in paras. 107-108 above,
both Canada and Mexico expressly accepted this point.
125. The Tribunal agrees. For the purposes of this Award, the Tribunal need not pass upon
all the issues debated before it as to the FTC’s interpretations of 31 July 2001. But in its
view, there can be no doubt that, by interpreting Article 1105(1) to prescribe the customary
international law minimum standard of treatment of aliens as the minimum standard of
treatment to be afforded to investments of investors of another Party under NAFTA, the term
“customary international law” refers to customary international law as it stood no earlier than
the time at which NAFTA came into force. It is not limited to the international law of the
19th century or even of the first half of the 20th century, although decisions from that period
remain relevant. In holding that Article 1105(1) refers to customary international law, the
51 See Art. 1116 (1), 1117 (1).
52 As noted in UNCTAD, Bilateral Investment Treaties in the Mid-1990s (United Nations, NY, 1998), pp.
53-55.
53 Transcript, p. 683.
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FTC interpretations incorporate current international law, whose content is shaped by the
conclusion of more than two thousand bilateral investment treaties and many treaties of
friendship and commerce. Those treaties largely and concordantly provide for “fair and
equitable” treatment of, and for “full protection and security” for, the foreign investor and his
investments. Correspondingly the investments of investors under NAFTA are entitled, under
the customary international law which NAFTA Parties interpret Article 1105(1) to
comprehend, to fair and equitable treatment and to full protection and security.
(b) The applicable standard of denial of justice
126. Enough has been said to show the importance of the specific context in which an
Article 1105(1) claim is made. As noted already, in applying the international minimum
standard, it is vital to distinguish the different factual and legal contexts presented for
decision. It is one thing to deal with unremedied acts of the local constabulary and another to
second-guess the reasoned decisions of the highest courts of a State. Under NAFTA, parties
have the option to seek local remedies. If they do so and lose on the merits, it is not the
function of NAFTA tribunals to act as courts of appeal. As a NAFTA tribunal pointed out in
Azinian v. United Mexican States:
“The possibility of holding a State internationally liable for judicial decisions does
not, however, entitle a claimant to seek international review of the national court
decisions as though the international jurisdiction seised has plenary appellate
jurisdiction. This is not true generally, and it is not true for NAFTA.”54
The Tribunal went on to hold:
“A denial of justice could be pleaded if the relevant courts refuse to entertain a
suit, if they subject it to undue delay, or if they administer justice in a
seriously inadequate way…
There is a fourth type of denial of justice, namely the clear and malicious
misapplication of the law. This type of wrong doubtless overlaps with the
notion of ‘pretence of form’ to mask a violation of international law. In the
present case, not only has no such wrongdoing been pleaded, but the Arbitral
Tribunal wishes to record that it views the evidence as sufficient to dispel any
shadow over the bona fides of the Mexican judgments. Their findings cannot
possibly be said to have been arbitrary, let alone malicious.”55
54 Azinian v. United Mexican States (1999) 39 ILM 537 at p. 552 (para. 99).
55 Ibid., at pp. 552-3 (paras. 102-103).
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127. In the ELSI case, a Chamber of the Court described as arbitrary conduct that which
displays “a wilful disregard of due process of law, … which shocks, or at least surprises, a
sense of judicial propriety”. 56 It is true that the question there was whether certain
administrative conduct was “arbitrary”, contrary to the provisions of an FCN treaty.
Nonetheless (and without otherwise commenting on the soundness of the decision itself) the
Tribunal regards the Chamber’s criterion as useful also in the context of denial of justice, and
it has been applied in that context, as the Claimant pointed out. The Tribunal would stress
that the word “surprises” does not occur in isolation. The test is not whether a particular
result is surprising, but whether the shock or surprise occasioned to an impartial tribunal
leads, on reflection, to justified concerns as to the judicial propriety of the outcome, bearing
in mind on the one hand that international tribunals are not courts of appeal, and on the other
hand that Chapter 11 of NAFTA (like other treaties for the protection of investments) is
intended to provide a real measure of protection. In the end the question is whether, at an
international level and having regard to generally accepted standards of the administration of
justice, a tribunal can conclude in the light of all the available facts that the impugned
decision was clearly improper and discreditable, with the result that the investment has been
subjected to unfair and inequitable treatment. This is admittedly a somewhat open-ended
standard, but it may be that in practice no more precise formula can be offered to cover the
range of possibilities.57
2. The application of Article 1105(1) to the present case
128. Mondev questioned the decisions of the United States courts essentially on four
grounds. The Tribunal will take these in turn. Because the United States Supreme Court
denied certiorari without giving any reasons, it is necessary in each case to focus on the
unanimous decision of the SJC, delivered by Judge Fried.58 In approaching these four issues
the Tribunal has had regard to the contrasting expert opinions tendered for the Claimant by
Professor Coquillette and for the Respondent by Judge Kass.
56 Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), ICJ Reports 1989 p. 15 at p. 76
(para. 128), citing the judgment of the Court in the Asylum case, ICJ Reports 1950 p. 266 at p. 284, which
referred to arbitrary action being “substituted for the rule of law”.
57 One may compare the rule stated in the Harvard Draft Convention on the International Responsibility
of States for Injuries to Aliens, Article 8 (b), referring to a decision which “unreasonably departs from the
principles of justice recognized by the principal legal systems of the world”; reprinted in L.B. Sohn & R.R.
Baxter, “Responsibility of States for Injuries to the Economic Interests of Aliens” (1961) 55 AJIL 515 at p. 551.
58 427 Mass. 509 (1998).
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(a) The dismissal of LPA’s contract claim against the City
129. On this point the Supreme Judicial Court began by noting that whether there was a
binding contract, and whether the City was in breach, were issues which “had to be
considered together to come to a fair and sensible view of the arrangements between the
parties and their dealings with each other”. 59 This was because the contract contained
formulae and procedures to deal with unresolved issues (including the price to be paid for the
Hayward Parcel); if those formulae and procedures had not been included, the arrangement
would have lacked certainty on essential terms. By the same token, however, “if a party does
not follow those procedures, it should not be able to claim that the other side is in breach of
what is necessarily still an open-ended arrangement”. 60 For reasons given in detail in its
opinion the SJC concluded “that there was sufficient evidence to find a binding agreement, as
the jury indeed did find, but it is also clear, as a matter of law, that LPA failed to follow the
steps required of it under the Tripartite Agreement as supplemented to put the city in
breach”.61 In particular the SJC relied on earlier authority, including its own decision of 1954
in Leigh v. Rule, for the proposition that a material failure by a plaintiff to put the defendant
in breach “bars recovery… unless the plaintiff is excused from tender because the other party
has shown that he cannot or will not perform”.62 The only evidence of LPA’s tender of
performance was Campeau’s letter of 19 December 1988, but this, in the Court’s view, was
far too unspecific to satisfy the test in Leigh v. Rule. There was accordingly no basis in law
for finding the City in breach of contract.63 Moreover, the Court held, there was no outright
refusal by the City to comply with the contract, and LPA could not “attribute repudiation to
the city based on the mere fact that uncertainties remained that LPA shared responsibility for
resolving”.64 Nor did LPA’s claim based on the City’s bad faith assist it: the basis of that
claim was the City’s refusal to extend the expiry date for the exercise of the option, but the
City was under no contractual obligation to consent to an extension. 65
130. The Court noted that its analysis applied particularly in the case of “a complex and
heavily regulated transaction such as this one, where public entities and public and elected
59 Ibid., 516.
60 Ibid.
61 Ibid., pp. 516-517.
62 Ibid., p. 519, citing Leigh v. Rule, 331 Mass. 664, 668 (1954).
63 427 Mass. 509, 521 (1998), qualifying the letter as “an empty gesture that could not possibly have been
acted on in the time remaining” before the expiry of the option.
64 Ibid., p. 523.
65 Ibid., p. 526.
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officials with changing policies and constituencies are involved, and the transaction spans
many years”, and it went on to note a dictum of Justice Holmes that “[m]en must turn square
corners when they deal with the Government.”66 By inference, neither LPA nor Campeau
had turned such corners – in the absence of which “LPA was not excused from its obligation
to put the city in default”.67
131. Claimant argued that the SJC’s decision involved a “significant and serious
departure” from its previous jurisprudence, which was exacerbated when the SJC completely
failed to consider whether it should apply the rules it articulated retrospectively to Mondev’s
claims.68 In those circumstances the SCJ’s dismissal of LPA’s claims “was arbitrary and
profoundly unjust”. 69
132. The Respondent, on the other hand, argued that the SJC acted reasonably in
accordance with its existing jurisprudence, and there was no occasion to consider any
question of a new law or of its retrospective application.
133. The Tribunal is unimpressed by the “new law” argument so far as concerns the basic
principle set out in Leigh v. Rule70 and embodied in many other systems of contract law. The
question whether an agreement in principle to transfer real property is binding, and whether
all the conditions for the performance of such an agreement have been met, is one which all
legal systems have to face. In the Tribunal’s view, it is doubtful whether the SJC made new
law in its application of the principle in Leigh v. Rule. But even if it had done so its decision
would have fallen within the limits of common law adjudication. There is nothing here to
shock or surprise even a delicate judicial sensibility.
134. On balance, the position is the same with the so-called “square corners” rule. It is true
that Justice Holmes’s statement was made in a tax case, not a contract case, and it stands in
some tension with the general proposition (accepted as part of Massachusetts law) that
66 Ibid., p. 524, citing Rock Island, Ark. & La. R.R. v. United States, 254 US 141, 143 (1920).
67 427 Mass. 509, 524 (1998).
68 See, e.g., Transcript, p. 921, referring to the expert opinions of Professor Coquillette.
69 Transcript, p. 933.
70 331 Mass. 664 (1954).
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governments are subject to the same rules of contractual liability as are private parties.71 To
the extent that it might suggest the contrary, the “square corners” rule might raise a delicate
judicial eyebrow. Indeed a governmental prerogative to violate investment contracts would
appear to be inconsistent with the principles embodied in Article 1105 and with
contemporary standards of national and international law concerning governmental liability
for contractual performance. But in the Tribunal’s view, the SJC’s remark was at most a
subsidiary reason for a decision founded on normal principles of the Massachusetts law of
contracts, and the SJC expressly disclaimed any intention to absolve governments from
performing their contractual obligations.72 In its context the remark was merely
supplementary and was not itself the basis for the decision.
(b) The SJC’s failure to remand the contract claim
135. Alternatively, Mondev argued that, once the SJC had concluded that the issue of
tender of performance arose, it should have remanded questions of fact to the jury, in
particular the question whether Mondev was willing and able to perform or whether the City
had constructively repudiated the contract. The Respondent argued that under Massachusetts
law and practice it was for the SJC to decide whether or not to remand a question, and that
within extremely broad limits there was no basis on which such a decision could be
questioned under Article 1105(1).
136. The Tribunal agrees with the United States on this point. Questions of fact-finding on
appeal are quintessentially matters of local procedural practice. Except in extreme cases, the
Tribunal does not understand how the application of local procedural rules about such matters
as remand, or decisions as to the functions of juries vis-à-vis appellate courts, could violate
the standards embodied in Article 1105(1). On the approach adopted by Mondev, NAFTA
tribunals would turn into courts of appeal, which is not their role. Conceivably there might
be a problem if the appellate decision took into account some entirely new issue of fact
essential to the decision and there was a substantial failure to allow the affected party to
present its case. But LPA had (and exercised) the right to apply for a rehearing and then to
seek certiorari to the Supreme Court. In these circumstances there was no trace of a
procedural denial of justice.
71 See e.g., Minton Construction Corp. v. Commonwealth, 397 Mass 879 (1986); Space Master
International, Inc. v. City of Worcester, 940 F 2d 16 (1991).
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(c) The SJC’s failure to consider whether it retrospectively applied a new rule
137. The Claimant noted that the SJC had failed to consider whether the allegedly new rule
it was applying to government contracts should be applied retrospectively, and thereby
violated its own standards for judicial law-making. But as the Tribunal has already noted, the
Court’s decision on the point of Massachusetts contract law fell well within the interstitial
scope of law-making exercised by courts such as those of the United States – if indeed it was
new law at all. In any event, once again it is normally a matter for local courts to determine
whether and in what circumstances to apply new decisional law retrospectively.73
138. The European Court of Human Rights has given some guidance on this question
under Article 7 of the European Convention in the context of criminal proceedings, where the
effect of a new judicial decision is to impose a criminal liability which did not, or arguably
did not, exist when the crime was committed.74 If there is any analogy at all, it is much
fainter in civil cases.75 Assuming, for the sake of argument, that standards of this kind might
be applicable under Article 1105(1), in the Tribunal’s view there was no contravention of any
such standards in the present case.
(d) BRA’s statutory immunity
139. The Tribunal turns to the question of BRA’s statutory immunity for intentional torts
under the Massachusetts Tort Claims Act (PL 258). Under §10(c) of that Act, a public
employer which is not an “independent body politic and corporate” is immune from “any
claim arising out of an intentional tort, including assault, battery, false imprisonment, false
arrest, intentional mental distress, malicious prosecution, malicious abuse of process, libel,
slander, misrepresentation, deceit, invasion of privacy, interference with advantageous
relations or interference with contractual relations”. As recalled above, the trial judge
72 427 Mass. 509, 523 (1998).
73 From the cases cited, it appears that the Massachusetts courts may sometimes announce a change in
decisional law with prospective effect only (e.g., Tucker v. Badoian, 376 Mass 907 (1978)), but they will only
do so where there are “special circumstances”: Payton v. Abbott Labs, 386 Mass. 540, 565 (1982); Tamerlane
Corp. v. Warwick Ins. Co., 412 Mass. 486, 490 (1992); MacCormack v. Boston Edison Co., 423 Mass. 652
(1996).
74 See S.W. v. United Kingdom, ECHR, decision of 22 November 1995, paras. 34-36; C.R. v. United
Kingdom, ECHR, decision of 22 November 1995, paras. 32-34; Streletz, Kessler & Krenz v. Germany, ECHR,
decision of 22 March 2001, para. 50.
75 See e.g., Carbonara & Ventura v. Italy, ECHR, decision of 30 May 2000, paras. 64-69; Agoudimos &
Cefallonian Sky Shipping Co. v. Greece, ECHR, decision of 28 June 2001, paras. 29-30.
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declined to enter the jury’s verdict against BRA, holding that it was entitled to immunity as a
“public employer” under the Massachusetts Tort Claims Act. That decision was affirmed by
the SJC,76 which emphasised “the desirability of making the [Massachusetts Tort Claims Act]
regime as comprehensive as possible”.77 That decision was not challenged on certiorari to
the United States Supreme Court, no doubt on the basis that the matter involved the
interpretation of a Massachusetts statute and presented no federal claim or issue.78
140. In the present proceedings, Mondev did not challenge the correctness of this decision
as a matter of Massachusetts law. Rather, it argued that for a NAFTA Party to confer on one
of its public authorities immunity from suit in respect of wrongful conduct affecting an
investment was in itself a failure to provide full protection and security to the investment, and
contravened Article 1105(1). For its part the United States argued that Article 1105(1) did
not preclude limited grants of immunity from suit in respect of tortious conduct. It noted that
there is no consensus in international practice on whether statutory authorities should be
subject to the same rules of tortious liability as private parties. In the absence of any
authority under customary international law requiring statutory authorities to be generally
liable for their torts, or any consistent international practice, it could not be said that the
immunity of BRA infringed Article 1105(1).
International jurisprudence on immunities of public authorities
141. The parties sought to draw analogies for the present case from the field of foreign
State immunity. It is well established that foreign States and their agencies may claim
immunities in respect of conduct in the exercise of governmental authority, even if such
conduct is or would otherwise be civilly wrongful. Moreover in a series of decisions the
European Court of Human Rights has held that the conferral of immunity in ways recognised
in international practice does not involve a denial of access to a court, contrary to Article 6(1)
of the European Convention of Human Rights.79 By analogy, the United States argued, the
recognition of a limited statutory immunity for certain torts could not be considered a
76 427 Mass. 509, 527-535 (1998).
77 Ibid., p. 532.
78 As explained in the expert opinion of Judge Kenneth Starr for the Claimant, 29 January 2001.
79 See Al-Adsani v. United Kingdom, Application No. 35763/97, (2002) 34 EHRR 11; McElhinney v.
Ireland, Application No. 31253/96, (2002) 34 EHRR 13; Fogarty v. United Kingdom, Application No.
37112/97, (2002) 34 EHRR 12.
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violation of the international minimum standard or a denial of justice, given the lack of any
clear or consistent State practice requiring the denial of immunity.
142. The Tribunal is not persuaded that the doctrine of foreign State immunity presents any
useful analogy to the present situation. That immunity is concerned not with the position of
State agencies before their own courts, but before the courts of third States, where
considerations of interstate relations and the proper allocation of jurisdictional competence
are raised.
143. There is a closer analogy with certain decisions concerning statutory immunities of
State agencies before their own courts. In a number of cases the European Court of Human
Rights has held that special governmental immunities from suit raise questions of consistency
with Article 6(1) of the European Convention on Human Rights, because they effectively
exclude access to the courts in the determination of civil rights. As the Court said in Fogarty
v. United Kingdom:
“it would not be consistent with the rule of law in a democratic society or with
the basic principle underlying Article 6 § 1 – namely that civil claims must be
capable of being submitted to a judge for adjudication – if, for example, a
State could, without restraint or control by the Convention enforcement
bodies, remove from the jurisdiction of the courts a whole range of civil
claims or confer immunities from civil liability on large groups or categories
of persons…”80
On the other hand the Court recognises that it “may not create by way of interpretation of
Article 6(1) a substantive civil right which has no legal basis in the State concerned”. 81 By
parity of reasoning, there are difficulties in reading Article 1105(1) so as in effect to create a
new substantive civil right to sue BRA for tortious interference with contractual relations.
Moreover the distinction between the existence of a civil liability and a defence to a lawsuit
80 Fogarty v. United Kingdom, Application No. 37112/97, (2002) 34 EHRR 12, paras. 24-25, citing
Fayed v. the United Kingdom judgment of 21 September 1994, Series A no. 294-B, § 65. See also Tinnelly &
Sons Ltd. v. United Kingdom, (1999) 27 EHRR 249; Devlin v. United Kingdom, judgment of 30 January 2002;
Osman v. United Kingdom, (2000) 29 EHRR 245; TP & KM v. United Kingdom (2002) 34 EHRR 2.
81 Al-Adsani v. United Kingdom, Application No. 35763/97, (2002) 34 EHRR 11 at para. 47; Fogarty v.
United Kingdom, Application No. 37112/97, (2002) 34 EHRR 12 at para. 25; McElhinney v. Ireland,
Application No. 31253/96, (2002) 34 EHRR 13 at para. 24.
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can be difficult to draw, as the case of Matthews v. Ministry of Defence, which was debated
before the Tribunal, demonstrates.82
144. These decisions concern the “right to a court”, an aspect of the human rights
conferred on all persons by the major human rights conventions and interpreted by the
European Court in an evolutionary way. They emanate from a different region, and are not
concerned, as Article 1105(1) of NAFTA is concerned, specifically with investment
protection. At most, they provide guidance by analogy as to the possible scope of NAFTA’s
guarantee of “treatment in accordance with international law, including fair and equitable
treatment and full protection and security”. But the Tribunal would observe that, as soon as it
was decided that BRA was covered by the statutory immunity (a matter for Massachusetts
law), then the existence of the immunity was arguably to be classified as a matter of
substance rather than procedure in terms of the distinction under Article 6(1) of the European
Convention.
Rationale for exempting public authorities from liability for intentional torts
145. More important than analogies from other legal regimes is the question of the
rationale for the BRA’s immunity. The United States argued that the conferral of a limited
immunity on certain State authorities for intentional torts was neither arbitrary nor
indiscriminate. It adduced in support evidence of two kinds, first, that related to the
legislative history and rationale underlying the exemption for intentional torts, and secondly,
comparative law indications that there is nothing approaching an international consensus on
the appropriate extent of the immunities of public authorities in tort.
146. As to the first point, the United States noted that governmental immunity in actions in
tort had been general for many years. The Federal Tort Claims Act 1946 abrogated that
immunity for the United States itself, but subject to various exceptions including interference
with contractual rights (28 USC §2680(h)). In Massachusetts the equivalent change in the
law did not occur until 1978.83 As in other common law jurisdictions, governmental
immunity could sometimes be avoided, e.g., by suing the responsible officials in person, 84 but
82 See [2002] EWHC 13 (QB), decision of Keith J, 22 January 2002, overturned on appeal, [2002]
EWCA Civ 773, [2002] 3 All ER 513, Court of Appeal, decision of 29 May 2002.
83 Following Whitney v. City of Worcester, 373 Mass. 208 (1977).
84 Larson v. Domestic & Foreign Commerce Corporation, 337 US 682, 687 (1949); Bivens v. Six
Unknown Named Agents of Federal Bureau of Narcotics, 403 US 388 (1971).
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this did not affect the principle that the government itself could not be sued without its
consent. The United States argued that the existence of certain immunities of public
authorities with respect to intentional torts is relatively well known, 85 and cannot be regarded
as exceptional or eccentric in international terms.
147. For its part, the Claimant argued that any governmental immunity from suit in
contract or tort, at least where the only remedy sought was damages, was increasingly seen as
anomalous,86 and that it was inconsistent with the express requirement in Article 1105(1) for
“full protection and security” that the government be able to avoid liabilities arising under the
general law of the land.
148. The Tribunal notes that the broad exception for intentional torts in United States
legislation, and the sometimes artificial ways in which they have been circumvented,87 have
led to criticism and to suggestions that the exception be repealed, leaving the government to
rely on the “discretionary functions” exception in the legislation, or to defend the case on the
merits.88 On the other hand, it does not appear that these suggestions have been acted on at
federal or state level.
The comparative law experience with tortious immunity of public authorities
149. As to the second point, the United States referred to a comparative review which
concluded that “in no legal system today is [the liability of officials for wrongful acts] the
same as that of private individuals or corporations”. 89 The authors of that study, Professors
Bell and Bradley, go on to develop the range of limitations on governmental liability still
existing in many States, while noting at the same time a general tendency towards widening
the scope of liability. It also noted the rather brief comparative review of jurisprudence on
interference with contractual rights, undertaken in the context of the ILC’s work on State
responsibility, which concluded that there were important differences in approach to tortious
interference within Western legal systems, and even more so if non-Western systems are
85 There is an equivalent immunity from suit for foreign States under the Foreign Sovereign Immunities
Act 1976 (USA), Stat. 2891, § 1604.
86 As an early example of this trend it referred to Larson v. Domestic & Foreign Commerce Corp., 337
US 682, 703-4 (1949), although the Court did in fact grant immunity in that contract case on the ground that the
United States was indirectly impleaded.
87 E.g., Andrews v. United States, 732 F. 2d 366 (1984); Sheridan v. United States, 487 US 392 (1988).
88 See, e.g., Davis & Pierce, Administrative Law Treatise (3rd edn., 1994), pp. 244-5.
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taken into account. In short, there is no international consensus on the proper scope of that
tort.90
150. The Claimant argued that comparative reviews of the position in non-NAFTA States,
and decisions of the European Court of Human Rights, were irrelevant to the question of the
extent of NAFTA protection. NAFTA provided its own standard for full protection and
security. The conferral on a public employer such as BRA of a blanket immunity from suit
for tortious interference infringed that standard, and did so irrespective of whether the
conduct immunized was itself a breach of NAFTA. According to the Claimant, Article
1105(1) requires that there be a remedy “when a State breaches its own laws in a manner that
is aimed directly at and interferes with a foreign investment”. 91 In any event, the conferral of
a general immunity for intentional torts would be disproportionate under Article 6(1) as
applied by the European Court, and a fortiori under the more explicit standard of full
protection afforded by NAFTA.
The Tribunal’s conclusions
151. In the Tribunal’s opinion, circumstances can be envisaged where the conferral of a
general immunity from suit for conduct of a public authority affecting a NAFTA investment
could amount to a breach of Article 1105(1) of NAFTA. Indeed the United States implicitly
accepted as much. It did not argue that public authorities could, for example, be given
immunity in contract vis-à-vis NAFTA investors and investments.
152. But the distinction between conduct compliant with or in breach of NAFTA Article
1105(1) cannot be co-extensive with the distinction between tortious conduct and breach of
contract. For example, the Massachusetts legislation immunizes public authorities from
liability for assault and battery. An investor whose local staff had been assaulted by the
police while at work could well claim that its investment was not accorded “treatment in
accordance with international law, including… full protection and security” if the
government were immune from suit for the assaults. In such a case, the availability of an
89 J. Bell & A.W. Bradley, Governmental Liability: A Comparative Study (United Kingdom Comparative
Law Series, vol. 13, 1991) p. 2.
90 J. Crawford, Second Report on State Responsibility, A/CN.4/498/Add. 3, 1 April 1999.
91 Transcript, p. 910.
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action in tort against individual (possibly unidentifiable) officers might not be a sufficient
basis to avoid the situation being characterised as a breach of Article 1105(1).
153. The function of the present Tribunal is not, however, to consider hypothetical
situations, or indeed any other statutory immunity than that for tortious interference with
contractual relations. This was the immunity relied on by BRA and upheld by the trial judge
and the appeal courts. In that specific context, reasons can well be imagined why a
legislature might decide to immunize a regulatory authority, mandated to deal with
commercial redevelopment plans, from potential liability for tortious interference. Such an
authority will necessarily have both detailed knowledge of the relevant contractual relations
and the power to interfere in those relations by granting or not granting permissions. If sued,
it will be able to plead that it was acting in good faith and in the exercise of a legitimate
mandate – but such a claim may well not justify summary dismissal and will thus be a triable
issue, with consequent distraction to the work of the Authority.
154. After considering carefully the evidence and argument adduced and the authorities
cited by the parties, the Tribunal is not persuaded that the extension to a statutory authority of
a limited immunity from suit for interference with contractual relations amounts in this case
to a breach of Article 1105(1). Of course such an immunity could not protect a NAFTA State
Party from a claim for conduct which was substantively in breach of NAFTA standards – but
for this NAFTA provides its own remedy, since it gives an investor the right to go directly to
international arbitration in respect of conduct occurring after NAFTA’s entry into force. In a
Chapter 11 arbitration, no local statutory immunity would apply. 92 On the other hand, within
broad limits, the extent to which a State decides to immunize regulatory authorities from suit
for interference with contractual relations is a matter for the competent organs of the State to
decide.
155. In the same context Mondev complained that the Massachusetts Act dealing with
unfair or deceptive practices in trade and commerce (G.L. Chapter 93A) was held by the trial
judge to be inapplicable to BRA notwithstanding that it engaged in the regulation of
commercial activity or acted for commercial motives. But if what has been said above as to
the partial immunity of BRA from suit is correct, then a fortiori there could be no breach of
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Article 1105(1) in holding Chapter 93A inapplicable to BRA. NAFTA does not require a
State to apply its trade practices legislation to statutory authorities.
156. In reaching these conclusions, the Tribunal has been prepared to assume that the
decision to allow BRA’s statutory immunity could have involved conduct of the Respondent
State in breach of Article 1105(1) after NAFTA’s entry into force on 1 January 1994. That
assumption may be questioned. The United States’ courts, operating in accordance with the
rule of law, had no choice but to give effect to a statutory immunity existing at the time the
acts in question were performed and not subsequently repealed, once they had concluded that
the statute in question did apply. 93 It is not disputed by the Claimant that this decision was in
accordance with Massachusetts law, and it did not involve on its face anything arbitrary or
discriminatory or unjust, i.e., any new act which might be characterised as in itself a breach
of Article 1105(1).94 In other words, if it was not in December 1993 a breach of NAFTA for
BRA to enjoy immunity from suit for tortious interference (and, because NAFTA was not
then in force, it could not have been such a breach), it is far from clear how the (ex hypothesi
correct) decision of the United States courts as to the scope of that immunity, after 1 January
1994, could have been in itself unfair or inequitable. On this ground alone, it may well be
that Mondev’s Article 1105(1) claim was bound to fail, and to fail whether or not one
classifies BRA’s statutory immunity as “procedural” or “substantive”.
E. Conclusion
157. For these reasons the Tribunal dismisses Mondev’s claims in their entirety.
92 As noted already, in the present case the conduct immunized took place well before NAFTA entered
into force, and NAFTA protections do not apply to it as such.
93 There was earlier Massachusetts authority in favour of the (unsurprising) proposition that BRA in
exercising its planning powers was “a public agency acting in its public capacity”: Reid v. Acting Commissioner
of Community Affairs, 362 Mass 136, 141 (1972).
94 Compare Consuelo et al. v. Argentina, IACHR, Report N 28/92, 2 October 1992, where immunity from
prosecution and suit was extended after the entry into force of the Convention in respect of acts committed
before its entry into force. The Inter-American Commission had no difficulty in rejecting Respondent’s
objection ratione temporis; it went on to hold that the conferral of immunity was in breach of the Convention.
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ANNEX 179
In The Matter Of Two Arbitrations Under Chapter 11 Of The NAFTA
And The UNCITRAL Arbitration Rules (1976)
B e t w e e n:
APOTEX INC.
Claimant
– and –
THE GOVERNMENT OF THE UNITED STATES OF AMERICA
Respondent
AWARD ON JURISDICTION AND ADMISSIBILITY
The Arbitral Tribunal:
Hon. Fern M. Smith
Mr. Clifford M. Davidson
Mr. Toby T. Landau QC (Presiding Arbitrator)
Secretary to the Tribunal: Ms. Aurélia Antonietti
Annex 179
Representation of the Parties
Representing the Claimant:
Mr. William A. Rakoczy
Ms. Lara E. FitzSimmons
Mr. Robert M. Teigen
Rakoczy Molino Mazzochi Siwik LLP
6 West Hubbard Street, Suite 500
Chicago, Illinois 60654
USA
Representing the Respondent:
Ms. Mary McLeod
Acting Legal Adviser
Mr. Jeffrey D. Kovar
Assistant Legal Adviser (to 1 August 2012)
Ms. Lisa J. Grosh
Assistant Legal Adviser (as of 1 August 2012)
Deputy Assistant Legal Adviser (to 1 August 2012)
Mr. Mark E. Feldman
Chief, NAFTA/CAFTA - DR Arbitration
(to 6 June 2011)
Mr. Jeremy K. Sharpe
Chief, Investment Arbitration
(as of 6 June 2011)
Mr. Neale H. Bergman
Mr. David M. Bigge
Ms. Alicia L. Cate
Mr. Patrick W. Pearsall
Attorney-Advisers
Office of International Claims
and Investment Disputes
United States Department of State
Washington, D.C. 20520
USA
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TABLE OF CONTENTS
I. INTRODUCTION .. .. .. .. .. .. .. .. 7
(A) THE PARTIES .. .. .. .. .. .. .. .. 7
(B) THE ARBITRATION AGREEMENTS .. .. .. .. .. 8
(C) GENERAL NATURE OF THE DISPUTE .. .. .. .. .. 9
(D) NATURE OF THE PRELIMINARY OBJECTIONS .. .. .. .. 10
(E) STRUCTURE OF THIS AWARD .. .. .. .. .. .. 11
II. PROCEDURAL HISTORY .. .. .. .. .. .. .. 12
III. RELEVANT U.S. STATUTORY BACKGROUND .. .. .. 18
IV. OUTLINE OF APOTEX’S CLAIMS .. .. .. .. .. 28
V. THE JURISDICTION & ADMISSIBILITY OBJECTIONS .. .. 41
(A) INTRODUCTION .. .. .. .. .. .. .. 41
(B) NO “INVESTMENT” OR “INVESTOR” .. .. .. .. .. 42
i. Relevant Provisions of NAFTA .. .. .. .. 42
ii. Respondent’s Position.. .. .. .. .. .. 45
iii. Apotex’s Position .. .. .. .. .. .. 46
iv. The Tribunal’s Analysis .. .. .. .. .. 48
a. “Investment” .. .. .. .. .. .. 48
b. “Investor” .. .. .. .. .. .. 77
v. Conclusion .. .. .. .. .. .. .. 78
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____________________________
(C) JUDICIAL FINALITY WITH RESPECT TO THE PRAVASTATIN CLAIM .. 79
i. Respondent’s Position.. .. .. .. .. .. 79
ii. Apotex’s Position .. .. .. .. .. .. 80
iii. The Tribunal’s Analysis .. .. .. .. .. 81
iv. Conclusion .. .. .. .. .. .. .. 99
(D) THE NAFTA TIME BAR .. .. .. .. .. .. 99
i. Relevant Provisions of NAFTA .. .. .. .. 99
ii. Respondent’s Position.. .. .. .. .. .. 100
iii. Apotex’s Position .. .. .. .. .. .. 102
iv. The Tribunal’s Analysis .. .. .. .. .. 103
v. Conclusion .. .. .. .. .. .. .. 110
(E) OVERALL CONCLUSION ON PRELIMINARY OBJECTIONS .. .. 110
VI. COSTS .. .. .. .. .. .. .. .. .. 112
(A) ALLOCATION OF COSTS .. .. .. .. .. .. 112
(B) ASSESSMENT OF COSTS .. .. .. .. .. .. 113
(C) SUMMARY .. .. .. .. .. .. .. .. 117
VII. OPERATIVE ORDER .. .. .. .. .. .. .. 118
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277. The starting point is to recall the very serious nature of the allegations against the U.S.
judicial system in Apotex’s Pravastatin Claim. Apotex asserts that the U.S. District Court
for the District of Columbia, and the U.S. Court of Appeals for the D.C. Circuit,
administered justice so deficiently as to violate Apotex’s rights under the U.S.
Constitution, and to put the United States in breach of its international law obligations
under the NAFTA. Yet, at the same time (and notwithstanding the gravity of the alleged
breaches), Apotex elected not to allow the U.S. Supreme Court all possible opportunities to
correct the alleged errors and transgressions. Instead, Apotex now requests that this
Tribunal – in effect – substitute itself for the U.S. Supreme Court, and sit as a supranational
appellate court, to review the judicial decisions of lower U.S. courts. The Tribunal
declines to do so, for three reasons.
278. First, as a general proposition, it is not the proper role of an international tribunal
established under NAFTA Chapter Eleven to substitute itself for the U.S. Supreme Court,
or to act as a supranational appellate court. This has been repeatedly emphasised in
previous decisions. For example:
(a) Mondev Award, at paragraph 126:135
“Under NAFTA, parties have the option to seek local remedies. If
they do so and lose on the merits, it is not the function of NAFTA
tribunals to act as courts of appeal.”
(b) Azinian Award, at paragraph 99:136
“The possibility of holding a State internationally liable for judicial
decisions does not, however, entitle a claimant to seek international
review of the national court decisions as though the international
jurisdiction seised has plenary appellate jurisdiction. This is not
true generally, and it is not true for NAFTA.”
135 Mondev Int’l Ltd. v. United States, NAFTA/ICSID Case No. ARB(AF)/99/2, Award (11 Oct. 2002).
136 Azinian v. United Mexican States, NAFTA/ICSID Case No. ARB(AF)/97/2, Award (1 Nov. 1999).
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(c) Waste Management Award, at paragraph 129:137
“Turning to the actual reasons given by the federal courts, the
Tribunal would observe that it is not a further court of appeal, nor
is Chapter 11 of NAFTA a novel form of amparo in respect of the
decisions of the federal courts of NAFTA parties.”
279. Second, and related to this, the “obvious futility” threshold is a high one. T his
necessarily follows from the nature of the rule to which it is an exception.
280. The requirement that local judicial remedies be exhausted before judicial acts may
found an international complaint was said by both Parties to flow from two
sources: (a) NAFTA Article 1101, by which any impugned act must be a
“measure adopted or maintained” by the host State (and the proposition that a
judicial act is not a measure adopted or maintained by the State unless “final”);
and (b) customary international law, as applicable by virtue of NAFTA Article
1131, which 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.”
281. As a matter of customary international law, both Parties asserted that an act of a
domestic court that remains subject to appeal has not ripened into the type of final
act that is sufficiently definite to implicate State responsibility - unless such
recourse is obviously futile. As summarised on behalf of the Respondent:
“The finality requirement is fundamental to claims that may result in
holding a State’s Judiciary in violation of international law. National
judicial systems including those of the three NAFTA Parties, provide for
higher courts to correct errors below. Decisions by higher courts harmonise
the interpretation and application of the law by lower courts. A finding by
an International Tribunal such as this one, that national courts violated
137 Waste Management Inc. v. United Mexican States, NAFTA/ICSID Case No. ARB(AF)/00/3, Award (30 Apr.
2004).
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international law implicates a systemic failure of the national judiciary.
International law recognises, therefore, that the national court system must
be given a chance to correct errors.”138
282. Although both Parties asserted that this rule applies to all causes of action
premised upon judicial acts, both Parties primarily invoked authorities concerning
denial of justice claims.139 Such claims depend upon the demonstration of a
systemic failure in the judicial system. Hence, a claimant cannot raise a claim that
a judicial act constitutes a breach of international law, without first proceeding
through the judicial system that it purports to challenge, and thereby allowing the
system an opportunity to correct itself. In the words of Jan Paulsson, Denial of
Justice in International Law 108 (2005):
“For a foreigner’s international grievance to proceed as a claim of denial of
justice, the national system must have been tested. Its perceived failings
cannot constitute an international wrong unless it has been given a chance to
correct itself.”
And as stated in Loewen Group v. United States:
“The purpose of the requirement that a decision of a lower court be
challenged through the judicial process before the State is responsible for a
breach of international law constituted by judicial decision is to afford the
State the opportunity of redressing through its legal system the inchoate
breach of international law occasioned by the lower court decision.”140
138 Transcript, Day 1, pages 162-3.
139 There is a live issue in the context of NAFTA as to whether the “finality” rule, or the requirement that
local judicial remedies be exhausted, applies to any claim arising out of a judicial act, or merely “denial of
justice” claims (or claims within the category of FET). This issue, however, was not pursued by the Parties
in this case. Instead, both Parties relied upon the analysis in The Loewen Group, Inc. and Raymond L.
Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award (26 June 2003), in which the
obligation to exhaust local remedies in a case in which the alleged violation of international law is founded
upon a judicial act was applied to claims under NAFTA Articles 1102 and 1110 as well as Article 1105 (see
Loewen, Award, para. 165, by reference, inter alia, to The Finnish Ships Arbitration Award, 3 R. INT’L
ARB. AWARDS 1480, 1495, 1503-05 (9 May 1934) and Nielsen v. Denmark [1958-1959] Y.B. EUR.
COMM’N H.R. 412 at 436, 438, 440, 444).
140 Loewen, Award, para. 156. The same basic principle has a long and broader heritage. See e.g., Edwin M.
Borchard, The Diplomatic Protection of Citizens Abroad 198 (1915) (“It is a fundamental principle that
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ANNEX 181
Responsibility of States for Internationally Wrongful Acts
2001
Text adopted by the Commission at its fifty-third session, in 2001, and submitted to the
General Assembly as a part of the Commission’s report covering the work of that session. The
report, which also contains commentaries on the draft articles, appears in Yearbook of the
International Law Commission, 2001, vol. II (Part Two). Text reproduced as it appears in the
annex to General Assembly resolution 56/83 of 12 December 2001, and corrected by document
A/56/49(Vol. I)/Corr.4.
Copyright © United Nations
2005
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Responsibility of States for Internationally Wrongful Acts
PART ONE
THE INTERNATIONALLY WRONGFUL ACT OF A STATE
CHAPTER I
GENERAL PRINCIPLES
Article l
Responsibility of a State for its internationally wrongful acts
Every internationally wrongful act of a State entails the international responsibility of that State.
Article 2
Elements of an internationally wrongful act of a State
There is an internationally wrongful act of a State when conduct consisting of an action or
omission:
(a) is attributable to the State under international law; and
(b) constitutes a breach of an international obligation of the State.
Article 3
Characterization of an act of a State as internationally wrongful
The characterization of an act of a State as internationally wrongful is governed by international
law. Such characterization is not affected by the characterization of the same act as lawful by internal
law.
CHAPTER II
ATTRIBUTION OF CONDUCT TO A STATE
Article 4
Conduct of organs of a State
1. The conduct of any State organ shall be considered an act of that State under international law,
whether the organ exercises legislative, executive, judicial or any other functions, whatever position it
holds in the organization of the State, and whatever its character as an organ of the central Government
or of a territorial unit of the State.
2. An organ includes any person or entity which has that status in accordance with the internal law
of the State.
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ANNEX 182
Draft articles on
Responsibility of States for Internationally Wrongful Acts,
with commentaries
2001
Text adopted by the International Law Commission at its fifty-third session, in
2001, and submitted to the General Assembly as a part of the Commission’s report
covering the work of that session (A/56/10). The report, which also contains
commentaries on the draft articles, appears in the Yearbook of the International Law
Commission, 2001, vol. II, Part Two, as corrected.
Copyright © United Nations
2008
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38 Report of the International Law Commission on the work of its fifty-third session
(7) The rule that the characterization of conduct as
unlawful in international law cannot be affected by the
characterization of the same act as lawful in internal law
makes no exception for cases where rules of international
law require a State to conform to the provisions of its internal
law, for instance by applying to aliens the same legal
treatment as to nationals. It is true that in such a case,
compliance with internal law is relevant to the question of
international responsibility. But this is because the rule of
international law makes it relevant, e.g. by incorporating
the standard of compliance with internal law as the applicable
international standard or as an aspect of it. Especially
in the fields of injury to aliens and their property and
of human rights, the content and application of internal
law will often be relevant to the question of international
responsibility. In every case it will be seen on analysis that
either the provisions of internal law are relevant as facts in
applying the applicable international standard, or else that
they are actually incorporated in some form, conditionally
or unconditionally, into that standard.
(8) As regards the wording of the rule, the formulation
“The municipal law of a State cannot be invoked to prevent
an act of that State from being characterized as wrongful
in international law”, which is similar to article 5 of the
draft adopted on first reading at the 1930 Hague Conference
and also to article 27 of the 1969 Vienna Convention,
has the merit of making it clear that States cannot use their
internal law as a means of escaping international responsibility.
On the other hand, such a formulation sounds like
a rule of procedure and is inappropriate for a statement
of principle. Issues of the invocation of responsibility belong
to Part Three, whereas this principle addresses the
underlying question of the origin of responsibility. In addition,
there are many cases where issues of internal law
are relevant to the existence or otherwise of responsibility.
As already noted, in such cases it is international law
which determines the scope and limits of any reference to
internal law. This element is best reflected by saying, first,
that the characterization of State conduct as internationally
wrongful is governed by international law, and secondly by
affirming that conduct which is characterized as wrongful
under international law cannot be excused by reference to
the legality of that conduct under internal law.
(9) As to terminology, in the English version the term
“internal law” is preferred to “municipal law”, because
the latter is sometimes used in a narrower sense, and because
the 1969 Vienna Convention speaks of “internal
law”. Still less would it be appropriate to use the term
“national law”, which in some legal systems refers only to
the laws emanating from the central legislature, as distinct
from provincial, cantonal or local authorities. The principle
in article 3 applies to all laws and regulations adopted
within the framework of the State, by whatever authority
and at whatever level.91 In the French version the expression
droit interne is preferred to législation interne and
loi interne, because it covers all provisions of the internal
legal order, whether written or unwritten and whether
they take the form of constitutional or legislative rules,
administrative decrees or judicial decisions.
91 Cf. LaGrand (Germany v. United States of America), Provisional
Measures, Order of 3 March 1999, I.C.J. Reports 1999, p. 9, at p. 16,
para. 28.
CHAPTER II
ATTRIBUTION OF CONDUCT TO A STATE
Commentary
(1) In accordance with article 2, one of the essential conditions
for the international responsibility of a State is that
the conduct in question is attributable to the State under
international law. Chapter II defines the circumstances in
which such attribution is justified, i.e. when conduct consisting
of an act or omission or a series of acts or omissions
is to be considered as the conduct of the State.
(2) In theory, the conduct of all human beings, corporations
or collectivities linked to the State by nationality,
habitual residence or incorporation might be attributed
to the State, whether or not they have any connection to
the Government. In international law, such an approach
is avoided, both with a view to limiting responsibility to
conduct which engages the State as an organization, and
also so as to recognize the autonomy of persons acting on
their own account and not at the instigation of a public
authority. Thus, the general rule is that the only conduct
attributed to the State at the international level is that of its
organs of government, or of others who have acted under
the direction, instigation or control of those organs, i.e. as
agents of the State.92
(3) As a corollary, the conduct of private persons is not
as such attributable to the State. This was established, for
example, in the Tellini case of 1923. The Council of the
League of Nations referred to a Special Commission of
Jurists certain questions arising from an incident between
Italy and Greece.93 This involved the assassination on
Greek territory of the Chairman and several members of
an international commission entrusted with the task of delimiting
the Greek-Albanian border. In reply to question
five, the Commission stated that:
The responsibility of a State is only involved by the commission in its
territory of a political crime against the persons of foreigners if the State
has neglected to take all reasonable measures for the prevention of the
crime and the pursuit, arrest and bringing to justice of the criminal.94
(4) The attribution of conduct to the State as a subject
of international law is based on criteria determined by international
law and not on the mere recognition of a link
92 See, e.g., I. Brownlie, System of the Law of Nations: State
Responsibility, Part I (Oxford, Clarendon Press, 1983), pp. 132–
166; D. D. Caron, “The basis of responsibility: attribution and other
trans-substantive rules”, The Iran-United States Claims Tribunal: Its
Contribution to the Law of State Responsibility, R. B. Lillich and
D. B. Magraw, eds. (Irvington-on-Hudson, N.Y., Transnational, 1998),
p. 109; L. Condorelli, “L’imputation à l’État d’un fait internationalement
illicite : solutions classiques et nouvelles tendances”, Recueil
des cours…, 1984–VI (Dordrecht, Martinus Nijhoff, 1988), vol. 189,
p. 9; H. Dipla, La responsabilité de l’État pour violation des
droits de l’homme: problèmes d’imputation (Paris, Pedone, 1994);
A. V. Freeman, “Responsibility of States for unlawful acts of their
armed forces”, Recueil des cours…, 1955–II (Leiden, Sijthoff, 1956),
vol. 88, p. 261; and F. Przetacznik, “The international responsibility of
States for the unauthorized acts of their organs”, Sri Lanka Journal of
International Law, vol. 1 (June 1989), p. 151.
93 League of Nations, Official Journal, 4th Year, No. 11 (November
1923), p. 1349.
94 Ibid., 5th Year, No. 4 (April 1924), p. 524. See also the Janes case,
UNRIAA, vol. IV (Sales No. 1951.V.1), p. 82 (1925).
Annex 182
State responsibility 39
of factual causality. As a normative operation, attribution
must be clearly distinguished from the characterization
of conduct as internationally wrongful. Its concern is to
establish that there is an act of the State for the purposes
of responsibility. To show that conduct is attributable to
the State says nothing, as such, about the legality or otherwise
of that conduct, and rules of attribution should not
be formulated in terms which imply otherwise. But the
different rules of attribution stated in chapter II have a
cumulative effect, such that a State may be responsible
for the effects of the conduct of private parties, if it failed
to take necessary measures to prevent those effects. For
example, a receiving State is not responsible, as such, for
the acts of private individuals in seizing an embassy, but
it will be responsible if it fails to take all necessary steps
to protect the embassy from seizure, or to regain control
over it.95 In this respect there is often a close link between
the basis of attribution and the particular obligation said
to have been breached, even though the two elements are
analytically distinct.
(5) The question of attribution of conduct to the State for
the purposes of responsibility is to be distinguished from
other international law processes by which particular organs
are authorized to enter into commitments on behalf
of the State. Thus the Head of State or Government or the
minister of foreign affairs is regarded as having authority
to represent the State without any need to produce full
powers.96 Such rules have nothing to do with attribution
for the purposes of State responsibility. In principle, the
State’s responsibility is engaged by conduct incompatible
with its international obligations, irrespective of the level
of administration or government at which the conduct occurs.
97 Thus, the rules concerning attribution set out in
this chapter are formulated for this particular purpose,
and not for other purposes for which it may be necessary
to define the State or its Government.
(6) In determining what constitutes an organ of a State
for the purposes of responsibility, the internal law and
practice of each State are of prime importance. The structure
of the State and the functions of its organs are not,
in general, governed by international law. It is a matter
for each State to decide how its administration is to be
structured and which functions are to be assumed by government.
But while the State remains free to determine its
internal structure and functions through its own law and
practice, international law has a distinct role. For example,
the conduct of certain institutions performing public
functions and exercising public powers (e.g. the police) is
attributed to the State even if those institutions are regarded
in internal law as autonomous and independent of the
executive government.98 Conduct engaged in by organs
of the State in excess of their competence may also be
95 See United States Diplomatic and Consular Staff in Tehran
(footnote 59 above).
96 See articles 7, 8, 46 and 47 of the 1969 Vienna Convention.
97 The point was emphasized, in the context of federal States, in
LaGrand (see footnote 91 above). It is not of course limited to federal
States. See further article 5 and commentary.
98 See paragraph (11) of the commentary to article 4; see also article
5 and commentary.
attributed to the State under international law, whatever
the position may be under internal law.99
(7) The purpose of this chapter is to specify the conditions
under which conduct is attributed to the State as a
subject of international law for the purposes of determining
its international responsibility. Conduct is thereby attributed
to the State as a subject of international law and
not as a subject of internal law. In internal law, it is common
for the “State” to be subdivided into a series of distinct
legal entities. For example, ministries, departments,
component units of all kinds, State commissions or corporations
may have separate legal personality under internal
law, with separate accounts and separate liabilities. But
international law does not permit a State to escape its international
responsibilities by a mere process of internal
subdivision. The State as a subject of international law is
held responsible for the conduct of all the organs, instrumentalities
and officials which form part of its organization
and act in that capacity, whether or not they have
separate legal personality under its internal law.
(8) Chapter II consists of eight articles. Article 4 states
the basic rule attributing to the State the conduct of its
organs. Article 5 deals with conduct of entities empowered
to exercise the governmental authority of a State, and
article 6 deals with the special case where an organ of
one State is placed at the disposal of another State and
empowered to exercise the governmental authority of that
State. Article 7 makes it clear that the conduct of organs
or entities empowered to exercise governmental authority
is attributable to the State even if it was carried out
outside the authority of the organ or person concerned or
contrary to instructions. Articles 8 to 11 then deal with
certain additional cases where conduct, not that of a State
organ or entity, is nonetheless attributed to the State in
international law. Article 8 deals with conduct carried out
on the instructions of a State organ or under its direction
or control. Article 9 deals with certain conduct involving
elements of governmental authority, carried out in the absence
of the official authorities. Article 10 concerns the
special case of responsibility in defined circumstances for
the conduct of insurrectional movements. Article 11 deals
with conduct not attributable to the State under one of the
earlier articles which is nonetheless adopted by the State,
expressly or by conduct, as its own.
(9) These rules are cumulative but they are also limitative.
In the absence of a specific undertaking or guarantee
(which would be a lex specialis100), a State is not responsible
for the conduct of persons or entities in circumstances
not covered by this chapter. As the Iran-United States
Claims Tribunal has affirmed, “in order to attribute an act
to the State, it is necessary to identify with reasonable
certainty the actors and their association with the State”.101
This follows already from the provisions of article 2.
99 See article 7 and commentary.
100 See article 55 and commentary.
101 Kenneth P. Yeager v. The Islamic Republic of Iran, Iran-U.S.
C.T.R., vol. 17 , p. 92, at pp. 101–102 (1987).
Annex 182
40 Report of the International Law Commission on the work of its fifty-third session
Article 4. Conduct of organs of a State
1. The conduct of any State organ shall be considered
an act of that State under international law,
whether the organ exercises legislative, executive, judicial
or any other functions, whatever position it holds
in the organization of the State, and whatever its character
as an organ of the central Government or of a
territorial unit of the State.
2. An organ includes any person or entity which
has that status in accordance with the internal law of
the State.
Commentary
(1) Paragraph 1 of article 4 states the first principle of
attribution for the purposes of State responsibility in international
law—that the conduct of an organ of the State
is attributable to that State. The reference to a “State organ”
covers all the individual or collective entities which
make up the organization of the State and act on its behalf.
It includes an organ of any territorial governmental entity
within the State on the same basis as the central governmental
organs of that State: this is made clear by the final
phrase.
(2) Certain acts of individuals or entities which do not
have the status of organs of the State may be attributed to
the State in international law, and these cases are dealt with
in later articles of this chapter. But the rule is nonetheless
a point of departure. It defines the core cases of attribution,
and it is a starting point for other cases. For example,
under article 8 conduct which is authorized by the State,
so as to be attributable to it, must have been authorized by
an organ of the State, either directly or indirectly.
(3) That the State is responsible for the conduct of its
own organs, acting in that capacity, has long been recognized
in international judicial decisions. In the Moses
case, for example, a decision of a Mexico-United States
Mixed Claims Commission, Umpire Lieber said: “An
officer or person in authority represents pro tanto his government,
which in an international sense is the aggregate
of all officers and men in authority.”102 There have been
many statements of the principle since then.103
(4) The replies by Governments to the Preparatory Committee
for the 1930 Hague Conference104 were unanimously
of the view that the actions or omissions of organs
of the State must be attributed to it. The Third Committee
of the Conference adopted unanimously on first reading
an article 1, which provided that international responsibility
shall be incurred by a State as a consequence of “any
102 Moore, History and Digest, vol. III, p. 3127, at p. 3129 (1871).
103 See, e.g., Claims of Italian Nationals (footnote 41 above);
Salvador Commercial Company, UNRIAA, vol. XV (Sales No. 66.V.3),
p. 455, at p. 477 (1902); and Finnish Shipowners (Great Britain/Finland),
ibid., vol. III (Sales No. 1949.V.2), p. 1479, at p. 1501 (1934).
104 League of Nations, Conference for the Codification of International
Law, Bases of Discussion … (see footnote 88 above), pp. 25, 41
and 52; Supplement to Volume III: Replies made by the Governments
to the Schedule of Points; Replies of Canada and the United States of
America (document C.75(a)M.69(a).1929.V), pp. 2–3 and 6.
failure on the part of its organs to carry out the international
obligations of the State”.105
(5) The principle of the unity of the State entails that the
acts or omissions of all its organs should be regarded as
acts or omissions of the State for the purposes of international
responsibility. It goes without saying that there is
no category of organs specially designated for the commission
of internationally wrongful acts, and virtually any
State organ may be the author of such an act. The diversity
of international obligations does not permit any general
distinction between organs which can commit internationally
wrongful acts and those which cannot. This is reflected
in the closing words of paragraph 1, which clearly
reflect the rule of international law in the matter.
(6) Thus, the reference to a State organ in article 4 is intended
in the most general sense. It is not limited to the organs
of the central government, to officials at a high level
or to persons with responsibility for the external relations
of the State. It extends to organs of government of whatever
kind or classification, exercising whatever functions,
and at whatever level in the hierarchy, including those at
provincial or even local level. No distinction is made for
this purpose between legislative, executive or judicial organs.
Thus, in the Salvador Commercial Company case,
the tribunal said that:
a State is responsible for the acts of its rulers, whether they belong to
the legislative, executive, or judicial department of the Government, so
far as the acts are done in their official capacity.106
ICJ has also confirmed the rule in categorical terms. In
Difference Relating to Immunity from Legal Process of a
Special Rapporteur of the Commission on Human Rights,
it said:
According to a well-established rule of international law, the conduct of
any organ of a State must be regarded as an act of that State. This rule
… is of a customary character.107
In that case the Court was principally concerned with
decisions of State courts, but the same principle applies to
legislative and executive acts.108 As PCIJ said in Certain
German Interests in Polish Upper Silesia (Merits):
105 Reproduced in Yearbook ... 1956, vol. II, p. 225, document
A/CN.4/96, annex 3.
106 See Salvador Commercial Company (footnote 103 above).
See also Chattin case, UNRIAA, vol. IV (Sales No. 1951.V.1), p. 282,
at pp. 285–286 (1927); and Dispute concerning the interpretation of
article 79 of the Treaty of Peace, ibid., vol. XIII (Sales No. 64.V.3),
p. 389, at p. 438 (1955).
107 Difference Relating to Immunity from Legal Process of a
Special Rapporteur of the Commission on Human Rights (see footnote
56 above), p. 87, para. 62, referring to the draft articles on State responsibility,
article 6, now embodied in article 4.
108 As to legislative acts, see, e.g., German Settlers in Poland
(footnote 65 above), at pp. 35–36; Treatment of Polish Nationals (footnote
75 above), at pp. 24–25; Phosphates in Morocco (footnote 34 above),
at pp. 25–26; and Rights of Nationals of the United States of America
in Morocco, Judgment, I.C.J. Reports 1952, p. 176, at pp. 193–194.
As to executive acts, see, e.g., Military and Paramilitary Activities in
and against Nicaragua (footnote 36 above); and ELSI (footnote 85
above). As to judicial acts, see, e.g., “Lotus” (footnote 76 above);
Jurisdiction of the Courts of Danzig (footnote 82 above); and Ambatielos,
Merits, Judgment, I.C.J. Reports 1953, p. 10, at pp. 21–22. In some
cases, the conduct in question may involve both executive and judicial
acts; see, e.g., Application of the Convention of 1902 (footnote 83 above)
at p. 65.
Annex 182
State responsibility 41
From the standpoint of International Law and of the Court which is its
organ, municipal laws ... express the will and constitute the activities
of States, in the same manner as do legal decisions or administrative
measures.109
Thus, article 4 covers organs, whether they exercise
“legislative, executive, judicial or any other functions”.
This language allows for the fact that the principle of the
separation of powers is not followed in any uniform way,
and that many organs exercise some combination of public
powers of a legislative, executive or judicial character.
Moreover, the term is one of extension, not limitation,
as is made clear by the words “or any other functions”.110
It is irrelevant for the purposes of attribution that the conduct
of a State organ may be classified as “commercial”
or as acta iure gestionis. Of course, the breach by a State
of a contract does not as such entail a breach of international
law.111 Something further is required before international
law becomes relevant, such as a denial of justice
by the courts of the State in proceedings brought by the
other contracting party. But the entry into or breach of a
contract by a State organ is nonetheless an act of the State
for the purposes of article 4,112 and it might in certain circumstances
amount to an internationally wrongful act.113
(7) Nor is any distinction made at the level of principle
between the acts of “superior” and “subordinate” officials,
provided they are acting in their official capacity.
This is expressed in the phrase “whatever position it holds
in the organization of the State” in article 4. No doubt
lower-level officials may have a more restricted scope of
activity and they may not be able to make final decisions.
But conduct carried out by them in their official capacity
is nonetheless attributable to the State for the purposes of
article 4. Mixed commissions after the Second World War
often had to consider the conduct of minor organs of the
State, such as administrators of enemy property, mayors
and police officers, and consistently treated the acts of
such persons as attributable to the State.114
109 Certain German Interests in Polish Upper Silesia, Merits, Judgment
No. 7, 1926, P.C.I.J., Series A, No. 7, at p. 19.
110 These functions might involve, e.g. the giving of administrative
guidance to the private sector. Whether such guidance involves a breach
of an international obligation may be an issue, but as “guidance” it is
clearly attributable to the State. See, e.g., GATT, Report of the Panel,
Japan–Trade in Semi-conductors, 24 March 1988, paras. 110–111;
and WTO, Report of the Panel, Japan–Measures affecting Consumer
Photographic Film and Paper (WT/DS44/R), paras. 10.12–10.16.
111 See article 3 and commentary.
112 See, e.g., the decisions of the European Court of Human Rights
in Swedish Engine Drivers’ Union v. Sweden, Eur. Court H.R., Series
A, No. 20 (1976), at p. 14; and Schmidt and Dahlström v. Sweden, ibid.,
Series A, No. 21 (1976), at p. 15.
113 The irrelevance of the classification of the acts of State organs
as iure imperii or iure gestionis was affirmed by all those members of
the Sixth Committee who responded to a specific question on this issue
from the Commission (see Yearbook ... 1998, vol. II (Part Two), p. 17,
para. 35).
114 See, e.g., the Currie case, UNRIAA, vol. XIV (Sales No.
65.V.4), p. 21, at p. 24 (1954); Dispute concerning the interpretation
of article 79 (footnote 106 above), at pp. 431–432; and Mossé case,
UNRIAA, vol. XIII (Sales No. 64.V.3), p. 486, at pp. 492–493 (1953).
For earlier decisions, see the Roper case, ibid., vol. IV (Sales No. 1951.
V.1), p. 145 (1927); Massey, ibid., p. 155 (1927); Way, ibid., p. 391, at
p. 400 (1928); and Baldwin, ibid., vol. VI (Sales No. 1955.V.3), p. 328
(1933). Cf. the consideration of the requisition of a plant by the Mayor
of Palermo in ELSI (see footnote 85 above), e.g. at p. 50, para. 70.
(8) Likewise, the principle in article 4 applies equally to
organs of the central government and to those of regional
or local units. This principle has long been recognized.
For example, the Franco-Italian Conciliation Commission
in the Heirs of the Duc de Guise case said:
For the purposes of reaching a decision in the present case it matters
little that the decree of 29 August 1947 was not enacted by the Italian
State but by the region of Sicily. For the Italian State is responsible
for implementing the Peace Treaty, even for Sicily, notwithstanding the
autonomy granted to Sicily in internal relations under the public law of
the Italian Republic.115
This principle was strongly supported during the preparatory
work for the 1930 Hague Conference. Governments
were expressly asked whether the State became responsible
as a result of “[a]cts or omissions of bodies exercising
public functions of a legislative or executive character
(communes, provinces, etc.)”. All answered in the
affirmative.116
(9) It does not matter for this purpose whether the territorial
unit in question is a component unit of a federal State
or a specific autonomous area, and it is equally irrelevant
whether the internal law of the State in question gives the
federal parliament power to compel the component unit to
abide by the State’s international obligations. The award
in the “Montijo” case is the starting point for a consistent
series of decisions to this effect.117 The French-Mexican
Claims Commission in the Pellat case reaffirmed “the
principle of the international responsibility ... of a federal
State for all the acts of its separate States which give
rise to claims by foreign States” and noted specially that
such responsibility “... cannot be denied, not even in cases
where the federal Constitution denies the central Government
the right of control over the separate States or the
right to require them to comply, in their conduct, with the
rules of international law”.118 That rule has since been
consistently applied. Thus, for example, in the LaGrand
case, ICJ said:
Whereas the international responsibility of a State is engaged by the action
of the competent organs and authorities acting in that State, whatever
they may be; whereas the United States should take all measures at
its disposal to ensure that Walter LaGrand is not executed pending the
final decision in these proceedings; whereas, according to the information
available to the Court, implementation of the measures indicated
in the present Order falls within the jurisdiction of the Governor of
Arizona; whereas the Government of the United States is consequently
under the obligation to transmit the present Order to the said Governor;
whereas the Governor of Arizona is under the obligation to act in conformity
with the international undertakings of the United States.119
115 UNRIAA, vol. XIII (Sales No. 64.V.3), p. 150, at p. 161 (1951).
For earlier decisions, see, e.g., the Pieri Dominique and Co. case, ibid.,
vol. X (Sales No. 60.V.4), p. 139, at p. 156 (1905).
116 League of Nations, Conference for the Codification of International
Law, Bases of Discussion … (see footnote 104 above), p. 90;
Supplement to Vol. III … (ibid.), pp. 3 and 18.
117 See Moore, History and Digest, vol. II, p. 1440, at p. 1440
(1874). See also De Brissot and others, Moore, History and Digest,
vol. III, p. 2967, at pp. 2970–2971 (1855); Pieri Dominique and Co.
(footnote 115 above), at pp. 156–157; Davy case, UNRIAA, vol. IX
(Sales No. 59.V.5), p. 467, at p. 468 (1903); Janes case (footnote 94
above); Swinney, UNRIAA, vol. IV (Sales No. 1951.V.1), p. 101 (1925);
Quintanilla, ibid., p. 101, at p. 103 (1925); Youmans, ibid., p. 110,
at p. 116 (1925); Mallén, ibid., p. 173, at p. 177 (1927); Venable, ibid.,
p. 218, at p. 230 (1925); and Tribolet, ibid., p. 598, at p. 601 (1925).
118 UNRIAA, vol. V (Sales No. 1952.V.3), p. 534, at p. 536 (1929).
119 LaGrand, Provisional Measures (see footnote 91 above).
See also LaGrand (Germany v. United States of America), Judgment,
I.C.J.Reports 2001, p. 466, at p. 495, para. 81.
Annex 182
42 Report of the International Law Commission on the work of its fifty-third session
(10) The reasons for this position are reinforced by the
fact that federal States vary widely in their structure and
distribution of powers, and that in most cases the constituent
units have no separate international legal personality
of their own (however limited), nor any treaty-making
power. In those cases where the constituent unit of a federation
is able to enter into international agreements on its
own account,120 the other party may well have agreed to
limit itself to recourse against the constituent unit in the
event of a breach. In that case the matter will not involve
the responsibility of the federal State and will fall outside
the scope of the present articles. Another possibility is that
the responsibility of the federal State under a treaty may
be limited by the terms of a federal clause in the treaty.121
This is clearly an exception to the general rule, applicable
solely in relations between the States parties to the treaty
and in the matters which the treaty covers. It has effect
by virtue of the lex specialis principle, dealt with in article
55.
(11) Paragraph 2 explains the relevance of internal law
in determining the status of a State organ. Where the law
of a State characterizes an entity as an organ, no difficulty
will arise. On the other hand, it is not sufficient to refer to
internal law for the status of State organs. In some systems
the status and functions of various entities are determined
not only by law but also by practice, and reference exclusively
to internal law would be misleading. The internal
law of a State may not classify, exhaustively or at all,
which entities have the status of “organs”. In such cases,
while the powers of an entity and its relation to other bodies
under internal law will be relevant to its classification
as an “organ”, internal law will not itself perform the task
of classification. Even if it does so, the term “organ” used
in internal law may have a special meaning, and not the
very broad meaning it has under article 4. For example,
under some legal systems the term “government” refers
only to bodies at the highest level such as the Head of
State and the cabinet of ministers. In others, the police
have a special status, independent of the executive; this
cannot mean that for international law purposes they are
not organs of the State.122 Accordingly, a State cannot
avoid responsibility for the conduct of a body which does
in truth act as one of its organs merely by denying it that
status under its own law. This result is achieved by the use
of the word “includes” in paragraph 2.
(12) The term “person or entity” is used in article 4,
paragraph 2, as well as in articles 5 and 7. It is used in a
broad sense to include any natural or legal person, including
an individual office holder, a department, commission
or other body exercising public authority, etc. The term
“entity” is used in a similar sense123 in the draft articles
120 See, e.g., articles 56, paragraph 3, and 172, paragraph 3, of the
Constitution of the Swiss Confederation of 18 April 1999.
121 See, e.g., article 34 of the Convention for the Protection of the
World Cultural and Natural Heritage.
122 See, e.g., the Church of Scientology case, Germany, Federal Supreme
Court, Judgment of 26 September 1978, case No. VI ZR 267/76,
Neue Juristische Wochenschrift, No. 21 (May 1979), p. 1101; ILR,
vol. 65, p. 193; and Propend Finance Pty Ltd. v. Sing, England, Court of
Appeal, ILR, vol. 111, p. 611 (1997). These were State immunity cases,
but the same principle applies in the field of State responsibility.
123 See Yearbook … 1991, vol. II (Part Two), pp. 14–18.
on jurisdictional immunities of States and their property,
adopted in 1991.
(13) Although the principle stated in article 4 is clear
and undoubted, difficulties can arise in its application.
A particular problem is to determine whether a person
who is a State organ acts in that capacity. It is irrelevant
for this purpose that the person concerned may have had
ulterior or improper motives or may be abusing public
power. Where such a person acts in an apparently
official capacity, or under colour of authority, the actions
in question will be attributable to the State. The distinction
between unauthorized conduct of a State organ and
purely private conduct has been clearly drawn in international
arbitral decisions. For example, the award of the
Mexico-United States General Claims Commission in the
Mallén case involved, first, the act of an official acting in
a private capacity and, secondly, another act committed
by the same official in his official capacity, although in an
abusive way.124 The latter action was, and the former was
not, held attributable to the State. The French-Mexican
Claims Commission in the Caire case excluded responsibility
only in cases where “the act had no connexion with
the official function and was, in fact, merely the act of a
private individual”.125 The case of purely private conduct
should not be confused with that of an organ functioning
as such but acting ultra vires or in breach of the rules
governing its operation. In this latter case, the organ is
nevertheless acting in the name of the State: this principle
is affirmed in article 7.126 In applying this test, of course,
each case will have to be dealt with on the basis of its own
facts and circumstances.
Article 5. Conduct of persons or entities exercising
elements of governmental authority
The conduct of a person or entity which is not an
organ of the State under article 4 but which is empowered
by the law of that State to exercise elements of
the governmental authority shall be considered an act
of the State under international law, provided the person
or entity is acting in that capacity in the particular
instance.
Commentary
(1) Article 5 deals with the attribution to the State of
conduct of bodies which are not State organs in the sense
of article 4, but which are nonetheless authorized to
exercise governmental authority. The article is intended
to take account of the increasingly common phenomenon
of parastatal entities, which exercise elements of governmental
authority in place of State organs, as well as
situations where former State corporations have been privatized
but retain certain public or regulatory functions.
124 Mallén (see footnote 117 above), at p. 175.
125 UNRIAA, vol. V (Sales No. 1952.V.3), p. 516, at p. 531 (1929).
See also the Bensley case in Moore, History and Digest, vol. III, p. 3018
(1850) (“a wanton trespass … under no color of official proceedings,
and without any connection with his official duties”); and the Castelain
case ibid., p. 2999 (1880). See further article 7 and commentary.
126 See paragraph (7) of the commentary to article 7.
Annex 182
State responsibility 43
(2) The generic term “entity” reflects the wide variety
of bodies which, though not organs, may be empowered
by the law of a State to exercise elements of governmental
authority. They may include public corporations, semipublic
entities, public agencies of various kinds and even,
in special cases, private companies, provided that in each
case the entity is empowered by the law of the State to
exercise functions of a public character normally exercised
by State organs, and the conduct of the entity relates
to the exercise of the governmental authority concerned.
For example, in some countries private security firms may
be contracted to act as prison guards and in that capacity
may exercise public powers such as powers of detention
and discipline pursuant to a judicial sentence or to prison
regulations. Private or State-owned airlines may have
delegated to them certain powers in relation to immigration
control or quarantine. In one case before the Iran-United
States Claims Tribunal, an autonomous foundation established
by the State held property for charitable purposes
under close governmental control; its powers included the
identification of property for seizure. It was held that it
was a public and not a private entity, and therefore within
the tribunal’s jurisdiction; with respect to its administration
of allegedly expropriated property, it would in any
event have been covered by article 5.127
(3) The fact that an entity can be classified as public or
private according to the criteria of a given legal system,
the existence of a greater or lesser State participation in its
capital, or, more generally, in the ownership of its assets,
the fact that it is not subject to executive control—these
are not decisive criteria for the purpose of attribution of
the entity’s conduct to the State. Instead, article 5 refers
to the true common feature, namely that these entities
are empowered, if only to a limited extent or in a specific
context, to exercise specified elements of governmental
authority.
(4) Parastatal entities may be considered a relatively
modern phenomenon, but the principle embodied in article
5 has been recognized for some time. For example,
the replies to the request for information made by the
Preparatory Committee for the 1930 Hague Conference
indicated strong support from some Governments for the
attribution to the State of the conduct of autonomous bodies
exercising public functions of an administrative or legislative
character. The German Government, for example,
asserted that:
when, by delegation of powers, bodies act in a public capacity, e.g.,
police an area … the principles governing the responsibility of the State
for its organs apply with equal force. From the point of view of international
law, it does not matter whether a State polices a given area
with its own police or entrusts this duty, to a greater or less extent, to
autonomous bodies.128
The Preparatory Committee accordingly prepared the
following basis of discussion, though the Third Commit-
127 Hyatt International Corporation v. The Government of the Islamic
Republic of Iran, Iran-U.S. C.T.R., vol. 9, p. 72, at pp. 88–94
(1985).
128 League of Nations, Conference for the Codification of International
Law, Bases of Discussion … (see footnote 88 above), p. 90.
The German Government noted that these remarks would extend to the
situation where “the State, as an exceptional measure, invests private
organisations with public powers and duties or authorities [sic] them
to exercise sovereign rights, as in the case of private railway companies
permitted to maintain a police force”, ibid.
tee of the Conference was unable in the time available to
examine it:
A State is responsible for damage suffered by a foreigner as the result of
acts or omissions of such … autonomous institutions as exercise public
functions of a legislative or administrative character, if such acts or
omissions contravene the international obligations of the State.129
(5) The justification for attributing to the State under international
law the conduct of “parastatal” entities lies in
the fact that the internal law of the State has conferred on
the entity in question the exercise of certain elements of
the governmental authority. If it is to be regarded as an act
of the State for purposes of international responsibility,
the conduct of an entity must accordingly concern governmental
activity and not other private or commercial activity
in which the entity may engage. Thus, for example,
the conduct of a railway company to which certain police
powers have been granted will be regarded as an act of the
State under international law if it concerns the exercise of
those powers, but not if it concerns other activities (e.g.
the sale of tickets or the purchase of rolling stock).
(6) Article 5 does not attempt to identify precisely the
scope of “governmental authority” for the purpose of attribution
of the conduct of an entity to the State. Beyond
a certain limit, what is regarded as “governmental” depends
on the particular society, its history and traditions.
Of particular importance will be not just the content of the
powers, but the way they are conferred on an entity, the
purposes for which they are to be exercised and the extent
to which the entity is accountable to government for their
exercise. These are essentially questions of the application
of a general standard to varied circumstances.
(7) The formulation of article 5 clearly limits it to entities
which are empowered by internal law to exercise
governmental authority. This is to be distinguished from
situations where an entity acts under the direction or
control of the State, which are covered by article 8, and
those where an entity or group seizes power in the absence
of State organs but in situations where the exercise of
governmental authority is called for: these are dealt with
in article 9. For the purposes of article 5, an entity is
covered even if its exercise of authority involves an independent
discretion or power to act; there is no need to
show that the conduct was in fact carried out under the
control of the State. On the other hand, article 5 does not
extend to cover, for example, situations where internal
law authorizes or justifies certain conduct by way of selfhelp
or self-defence; i.e. where it confers powers upon
or authorizes conduct by citizens or residents generally.
The internal law in question must specifically authorize
the conduct as involving the exercise of public authority;
it is not enough that it permits activity as part of the
general regulation of the affairs of the community.
It is accordingly a narrow category.
Article 6. Conduct of organs placed at the disposal
of a State by another State
The conduct of an organ placed at the disposal of
a State by another State shall be considered an act of
the former State under international law if the organ is
129 Ibid., p. 92.
Annex 182
44 Report of the International Law Commission on the work of its fifty-third session
acting in the exercise of elements of the governmental
authority of the State at whose disposal it is placed.
Commentary
(1) Article 6 deals with the limited and precise situation
in which an organ of a State is effectively put at the disposal
of another State so that the organ may temporarily
act for its benefit and under its authority. In such a case,
the organ, originally that of one State, acts exclusively for
the purposes of and on behalf of another State and its conduct
is attributed to the latter State alone.
(2) The words “placed at the disposal of ” in article 6
express the essential condition that must be met in order
for the conduct of the organ to be regarded under international
law as an act of the receiving and not of the sending
State. The notion of an organ “placed at the disposal of ”
the receiving State is a specialized one, implying that the
organ is acting with the consent, under the authority of
and for the purposes of the receiving State. Not only must
the organ be appointed to perform functions appertaining
to the State at whose disposal it is placed, but in performing
the functions entrusted to it by the beneficiary State,
the organ must also act in conjunction with the machinery
of that State and under its exclusive direction and control,
rather than on instructions from the sending State.
Thus article 6 is not concerned with ordinary situations of
inter-State cooperation or collaboration, pursuant to treaty
or otherwise.130
(3) Examples of situations that could come within this
limited notion of a State organ “placed at the disposal” of
another State might include a section of the health service
or some other unit placed under the orders of another
country to assist in overcoming an epidemic or natural
disaster, or judges appointed in particular cases to act as
judicial organs of another State. On the other hand, mere
aid or assistance offered by organs of one State to another
on the territory of the latter is not covered by article 6. For
example, armed forces may be sent to assist another State
in the exercise of the right of collective self-defence or
for other purposes. Where the forces in question remain
under the authority of the sending State, they exercise elements
of the governmental authority of that State and not
of the receiving State. Situations can also arise where the
organ of one State acts on the joint instructions of its own
and another State, or there may be a single entity which is
a joint organ of several States. In these cases, the conduct
in question is attributable to both States under other articles
of this chapter.131
(4) Thus, what is crucial for the purposes of article 6 is
the establishment of a functional link between the organ
in question and the structure or authority of the receiv-
130 Thus, the conduct of Italy in policing illegal immigration at sea
pursuant to an agreement with Albania was not attributable to Albania:
Xhavara and Others v. Italy and Albania, application No. 39473/98,
Eur. Court H.R., decision of 11 January 2001. Conversely, the conduct
of Turkey taken in the context of the Turkey-European Communities
customs union was still attributable to Turkey: see WTO, Report of the
Panel, Turkey: Restrictions on Imports of Textile and Clothing Products
(WT/DS34/R), 31 May 1999, paras. 9.33–9.44.
131 See also article 47 and commentary.
ing State. The notion of an organ “placed at the disposal”
of another State excludes the case of State organs, sent
to another State for the purposes of the former State or
even for shared purposes, which retain their own autonomy
and status: for example, cultural missions, diplomatic
or consular missions, foreign relief or aid organizations.
Also excluded from the ambit of article 6 are situations in
which functions of the “beneficiary” State are performed
without its consent, as when a State placed in a position
of dependence, territorial occupation or the like is compelled
to allow the acts of its own organs to be set aside
and replaced to a greater or lesser extent by those of the
other State.132
(5) There are two further criteria that must be met for
article 6 to apply. First, the organ in question must possess
the status of an organ of the sending State; and secondly
its conduct must involve the exercise of elements of the
governmental authority of the receiving State. The first
of these conditions excludes from the ambit of article 6
the conduct of private entities or individuals which have
never had the status of an organ of the sending State. For
example, experts or advisers placed at the disposal of a
State under technical assistance programmes do not usually
have the status of organs of the sending State. The
second condition is that the organ placed at the disposal of
a State by another State must be “acting in the exercise of
elements of the governmental authority” of the receiving
State. There will only be an act attributable to the receiving
State where the conduct of the loaned organ involves
the exercise of the governmental authority of that State.
By comparison with the number of cases of cooperative
action by States in fields such as mutual defence, aid and
development, article 6 covers only a specific and limited
notion of “transferred responsibility”. Yet, in State practice
the situation is not unknown.
(6) In the Chevreau case, a British consul in Persia,
temporarily placed in charge of the French consulate, lost
some papers entrusted to him. On a claim being brought
by France, Arbitrator Beichmann held that: “the British
Government cannot be held responsible for negligence
by its Consul in his capacity as the person in charge of
the Consulate of another Power.”133 It is implicit in the
Arbitrator’s finding that the agreed terms on which the
British Consul was acting contained no provision allocating
responsibility for the Consul’s acts. If a third State had
brought a claim, the proper respondent in accordance with
article 6 would have been the State on whose behalf the
conduct in question was carried out.
(7) Similar issues were considered by the European
Commission of Human Rights in two cases relating to the
exercise by Swiss police in Liechtenstein of “delegated”
powers.134 At the relevant time Liechtenstein was not
132 For the responsibility of a State for directing, controlling or
coercing the internationally wrongful act of another, see articles 17 and
18 and commentaries.
133 UNRIAA, vol. II (Sales No. 1949.V.1), p. 1113, at p. 1141
(1931).
134 X and Y v. Switzerland, application Nos. 7289/75 and 7349/76,
decision of 14 July 1977; Council of Europe, European Commission
of Human Rights, Decisions and Reports, vol. 9, p. 57; and Yearbook
of the European Convention on Human Rights, 1977, vol. 20 (1978),
p. 372, at pp. 402–406.
Annex 182
State responsibility 45
a party to the Convention for the Protection of Human
Rights and Fundamental Freedoms (European Convention
on Human Rights), so that if the conduct was attributable
only to Liechtenstein no breach of the Convention
could have occurred. The Commission held the case admissible,
on the basis that under the treaty governing the
relations between Switzerland and Liechtenstein of 1923,
Switzerland exercised its own customs and immigration
jurisdiction in Liechtenstein, albeit with the latter’s consent
and in their mutual interest. The officers in question
were governed exclusively by Swiss law and were considered
to be exercising the public authority of Switzerland.
In that sense, they were not “placed at the disposal” of the
receiving State.135
(8) A further, long-standing example of a situation to
which article 6 applies is the Judicial Committee of the
Privy Council, which has acted as the final court of appeal
for a number of independent States within the Commonwealth.
Decisions of the Privy Council on appeal from
an independent Commonwealth State will be attributable
to that State and not to the United Kingdom. The Privy
Council’s role is paralleled by certain final courts of appeal
acting pursuant to treaty arrangements.136 There are
many examples of judges seconded by one State to another
for a time: in their capacity as judges of the receiving
State, their decisions are not attributable to the sending
State, even if it continues to pay their salaries.
(9) Similar questions could also arise in the case of organs
of international organizations placed at the disposal
of a State and exercising elements of that State’s governmental
authority. This is even more exceptional than
the inter-State cases to which article 6 is limited. It also
raises difficult questions of the relations between States
and international organizations, questions which fall outside
the scope of these articles. Article 57 accordingly excludes
from the ambit of the articles all questions of the
responsibility of international organizations or of a State
for the acts of an international organization. By the same
token, article 6 does not concern those cases where, for
example, accused persons are transferred by a State to an
international institution pursuant to treaty.137 In cooperating
with international institutions in such a case, the State
concerned does not assume responsibility for their subsequent
conduct.
Article 7. Excess of authority or contravention
of instructions
The conduct of an organ of a State or of a person
or entity empowered to exercise elements of the governmental
authority shall be considered an act of the
135 See also Drozd and Janousek v. France and Spain, Eur. Court
H.R., Series A, No. 240 (1992), paras. 96 and 110. See also Controller
and Auditor-General v. Davison (New Zealand, Court of Appeal), ILR,
vol. 104 (1996), p. 526, at pp. 536–537 (Cooke, P.) and pp. 574–576
(Richardson, J.). An appeal to the Privy Council on other grounds was
dismissed, Brannigan v. Davison, ibid., vol. 108, p. 622.
136 For example, Agreement relating to Appeals to the High Court of
Australia from the Supreme Court of Nauru (Nauru, 6 September 1976)
(United Nations, Treaty Series, vol. 1216, No. 19617, p. 151).
137 See, e.g., article 89 of the Rome Statute of the International
Criminal Court.
State under international law if the organ, person or
entity acts in that capacity, even if it exceeds its authority
or contravenes instructions.
Commentary
(1) Article 7 deals with the important question of unauthorized
or ultra vires acts of State organs or entities.
It makes it clear that the conduct of a State organ or an
entity empowered to exercise elements of the governmental
authority, acting in its official capacity, is attributable
to the State even if the organ or entity acted in excess of
authority or contrary to instructions.
(2) The State cannot take refuge behind the notion
that, according to the provisions of its internal law or
to instructions which may have been given to its organs
or agents, their actions or omissions ought not to have
occurred or ought to have taken a different form. This is
so even where the organ or entity in question has overtly
committed unlawful acts under the cover of its official
status or has manifestly exceeded its competence. It is
so even if other organs of the State have disowned the
conduct in question.138 Any other rule would contradict
the basic principle stated in article 3, since otherwise a
State could rely on its internal law in order to argue that
conduct, in fact carried out by its organs, was not attributable
to it.
(3) The rule evolved in response to the need for clarity
and security in international relations. Despite early
equivocal statements in diplomatic practice and by arbitral
tribunals,139 State practice came to support the proposition,
articulated by the British Government in response
to an Italian request, that “all Governments should always
be held responsible for all acts committed by their agents
by virtue of their official capacity”.140 As the Spanish
Government pointed out: “If this were not the case, one
would end by authorizing abuse, for in most cases there
would be no practical way of proving that the agent had
or had not acted on orders received.”141 At this time the
United States supported “a rule of international law that
sovereigns are not liable, in diplomatic procedure, for
damages to a foreigner when arising from the misconduct
of agents acting out of the range not only of their real but
138 See, e.g., the “Star and Herald” controversy, Moore, Digest,
vol. VI, p. 775.
139 In a number of early cases, international responsibility was
attributed to the State for the conduct of officials without making it
clear whether the officials had exceeded their authority: see, e.g., the
following cases: “Only Son”, Moore, History and Digest, vol. IV,
pp. 3404–3405; “William Lee”, ibid., p. 3405; and Donoughho’s, ibid.,
vol. III, p. 3012. Where the question was expressly examined, tribunals
did not consistently apply any single principle: see, e.g., the Lewis’s
case, ibid., p. 3019; the Gadino case, UNRIAA, vol. XV (Sales No.
66.V.3), p. 414 (1901); the Lacaze case, Lapradelle-Politis, vol. II,
p. 290, at pp. 297–298; and the“William Yeaton” case, Moore, History
and Digest, vol. III, p. 2944, at p. 2946.
140 For the opinions of the British and Spanish Governments given
in 1898 at the request of Italy in respect of a dispute with Peru,
see Archivio del Ministero degli Affari esteri italiano, serie politica P,
No. 43.
141 Note verbale by Duke Almodóvar del Río, 4 July 1898, ibid.
Annex 182
46 Report of the International Law Commission on the work of its fifty-third session
of their apparent authority”.142 It is probable that the different
formulations had essentially the same effect, since
acts falling outside the scope of both real and apparent
authority would not be performed “by virtue of … official
capacity”. In any event, by the time of the 1930 Hague
Conference, a majority of States responding to the Preparatory
Committee’s request for information were clearly in
favour of the broadest formulation of the rule, providing
for attribution to the State in the case of “[a]cts of officials
in the national territory in their public capacity (actes de
fonction) but exceeding their authority”.143 The Basis
of Discussion prepared by the Committee reflected this
view. The Third Committee of the Conference adopted an
article on first reading in the following terms:
International responsibility is … incurred by a State if damage is sustained
by a foreigner as a result of unauthorised acts of its officials
performed under cover of their official character, if the acts contravene
the international obligations of the State.144
(4) The modern rule is now firmly established in this
sense by international jurisprudence, State practice and
the writings of jurists.145 It is confirmed, for example,
in article 91 of the Protocol Additional to the Geneva
Conventions of 12 August 1949, and relating to the
protection of victims of international armed conflicts
(Protocol I), which provides that: “A Party to the conflict
… shall be responsible for all acts committed by persons
forming part of its armed forces”: this clearly covers acts
committed contrary to orders or instructions. The commentary
notes that article 91 was adopted by consensus
and “correspond[s] to the general principles of law on
international responsibility”.146
(5) A definitive formulation of the modern rule is found
in the Caire case. The case concerned the murder of a
French national by two Mexican officers who, after failing
to extort money, took Caire to the local barracks and
shot him. The Commission held:
that the two officers, even if they are deemed to have acted outside their
competence … and even if their superiors countermanded an order,
have involved the responsibility of the State, since they acted under
cover of their status as officers and used means placed at their disposal
on account of that status.147
142 “American Bible Society” incident, statement of United States
Secretary of State, 17 August 1885, Moore, Digest, vol. VI, p. 743;
“Shine and Milligen”, G. H. Hackworth, Digest of International Law
(Washington, D.C., United States Government Printing Office, 1943),
vol. V, p. 575; and “Miller”, ibid., pp. 570–571.
143 League of Nations, Conference for the Codification of International
Law, Bases of Discussion … (see footnote 88 above), point V,
No. 2 (b), p. 74, and Supplement to Vol. III … (see footnote 104 above),
pp. 3 and 17.
144 League of Nations, Conference for the Codification of International
Law, Bases of Discussion ..., document C.351(c)M.145(c).1930.
V (see footnote 88 above), p. 237. For a more detailed account of the
evolution of the modern rule, see Yearbook … 1975, vol. II, pp. 61–70.
145 For example, the 1961 revised draft by the Special Rapporteur,
Mr. García Amador, provided that “an act or omission shall likewise
be imputable to the State if the organs or officials concerned exceeded
their competence but purported to be acting in their official capacity”
(Yearbook ... 1961, vol. II, p. 53).
146 ICRC, Commentary on the Additional Protocols of 8 June 1977 to
the Geneva Conventions of 12 August 1949 (Geneva, Martinus Nijhoff,
1987), pp. 1053–1054.
147 Caire (see footnote 125 above). For other statements of the
rule, see Maal, UNRIAA, vol. X (Sales No. 60.V.4), pp. 732–733
(1903); La Masica, ibid., vol. XI (Sales No. 61.V.4), p. 560 (1916);
Youmans (footnote 117 above); Mallén, ibid.; Stephens, UNRIAA,
(6) International human rights courts and tribunals
have applied the same rule. For example, the Inter-
American Court of Human Rights in the Velásquez
Rodríguez case said:
This conclusion [of a breach of the Convention] is independent of
whether the organ or official has contravened provisions of internal
law or overstepped the limits of his authority: under international law a
State is responsible for the acts of its agents undertaken in their official
capacity and for their omissions, even when those agents act outside the
sphere of their authority or violate internal law.148
(7) The central issue to be addressed in determining
the applicability of article 7 to unauthorized conduct of
official bodies is whether the conduct was performed
by the body in an official capacity or not. Cases where
officials acted in their capacity as such, albeit unlawfully
or contrary to instructions, must be distinguished from
cases where the conduct is so removed from the scope
of their official functions that it should be assimilated to
that of private individuals, not attributable to the State.
In the words of the Iran-United States Claims Tribunal,
the question is whether the conduct has been “carried out
by persons cloaked with governmental authority”.149
(8) The problem of drawing the line between unauthorized
but still “official” conduct, on the one hand, and “private”
conduct on the other, may be avoided if the conduct
complained of is systematic or recurrent, such that
the State knew or ought to have known of it and should
have taken steps to prevent it. However, the distinction
between the two situations still needs to be made in some
cases, for example when considering isolated instances of
outrageous conduct on the part of persons who are officials.
That distinction is reflected in the expression “if the
organ, person or entity acts in that capacity” in article
7. This indicates that the conduct referred to comprises
only the actions and omissions of organs purportedly or
apparently carrying out their official functions, and not the
private actions or omissions of individuals who happen to
be organs or agents of the State.150 In short, the question
is whether they were acting with apparent authority.
(9) As formulated, article 7 only applies to the conduct
of an organ of a State or of an entity empowered to
exercise elements of the governmental authority, i.e.
vol. IV (Sales No. 1951.V.1), pp. 267–268 (1927); and Way (footnote
114 above), pp. 400–401. The decision of the United States Court of
Claims in Royal Holland Lloyd v. United States, 73 Ct. Cl. 722 (1931)
(Annual Digest of Public International Law Cases (London, Butterworth,
1938), vol. 6, p. 442) is also often cited.
148 Velásquez Rodríguez (see footnote 63 above); see also ILR,
vol. 95, p. 232, at p. 296.
149 Petrolane, Inc. v. The Government of the Islamic Republic of Iran,
Iran-U.S. C.T.R., vol. 27, p. 64, at p. 92 (1991). See also paragraph (13)
of the commentary to article 4.
150 One form of ultra vires conduct covered by article 7 would be
for a State official to accept a bribe to perform some act or conclude
some transaction. The articles are not concerned with questions that
would then arise as to the validity of the transaction (cf. the 1969
Vienna Convention, art. 50). So far as responsibility for the corrupt
conduct is concerned, various situations could arise which it is not necessary
to deal with expressly in the present articles. Where one State
bribes an organ of another to perform some official act, the corrupting
State would be responsible either under article 8 or article 17. The
question of the responsibility of the State whose official had been bribed
towards the corrupting State in such a case could hardly arise, but there
could be issues of its responsibility towards a third party, which would
be properly resolved under article 7.
Annex 182
State responsibility 47
only to those cases of attribution covered by articles 4, 5
and 6. Problems of unauthorized conduct by other persons,
groups or entities give rise to distinct problems, which are
dealt with separately under articles 8, 9 and 10.
(10) As a rule of attribution, article 7 is not concerned
with the question whether the conduct amounted to a
breach of an international obligation. The fact that instructions
given to an organ or entity were ignored, or that its
actions were ultra vires, may be relevant in determining
whether or not the obligation has been breached, but that
is a separate issue.151 Equally, article 7 is not concerned
with the admissibility of claims arising from internationally
wrongful acts committed by organs or agents acting
ultra vires or contrary to their instructions. Where there
has been an unauthorized or invalid act under local law
and as a result a local remedy is available, this will have to
be resorted to, in accordance with the principle of exhaustion
of local remedies, before bringing an international
claim.152
Article 8. Conduct directed or controlled by a State
The conduct of a person or group of persons shall
be considered an act of a State under international law
if the person or group of persons is in fact acting on
the instructions of, or under the direction or control
of, that State in carrying out the conduct.
Commentary
(1) As a general principle, the conduct of private persons
or entities is not attributable to the State under international
law. Circumstances may arise, however, where
such conduct is nevertheless attributable to the State because
there exists a specific factual relationship between
the person or entity engaging in the conduct and the State.
Article 8 deals with two such circumstances. The first involves
private persons acting on the instructions of the
State in carrying out the wrongful conduct. The second
deals with a more general situation where private persons
act under the State’s direction or control.153 Bearing in
mind the important role played by the principle of effectiveness
in international law, it is necessary to take into
account in both cases the existence of a real link between
the person or group performing the act and the State machinery.
(2) The attribution to the State of conduct in fact authorized
by it is widely accepted in international jurisprudence.
154 In such cases it does not matter that the person
or persons involved are private individuals nor whether
151 See ELSI (footnote 85 above), especially at pp. 52, 62 and 74.
152 See further article 44, subparagraph (b), and commentary.
153 Separate issues are raised where one State engages in internationally
wrongful conduct at the direction or under the control of
another State: see article 17 and commentary, and especially paragraph
(7) for the meaning of the words “direction” and “control” in
various languages.
154 See, e.g., the Zafiro case, UNRIAA, vol. VI (Sales No. 1955.
V.3), p. 160 (1925); the Stephens case (footnote 147 above), p. 267;
and Lehigh Valley Railroad Company and Others (U.S.A.) v. Germany
(Sabotage cases): “Black Tom” and “Kingsland” incidents, ibid.,
vol. VIII (Sales No. 58.V.2), p. 84 (1930) and p. 458 (1939).
their conduct involves “governmental activity”. Most
commonly, cases of this kind will arise where State organs
supplement their own action by recruiting or instigating
private persons or groups who act as “auxiliaries” while
remaining outside the official structure of the State. These
include, for example, individuals or groups of private individuals
who, though not specifically commissioned by the
State and not forming part of its police or armed forces,
are employed as auxiliaries or are sent as “volunteers” to
neighbouring countries, or who are instructed to carry out
particular missions abroad.
(3) More complex issues arise in determining whether
conduct was carried out “under the direction or control”
of a State. Such conduct will be attributable to the State
only if it directed or controlled the specific operation and
the conduct complained of was an integral part of that operation.
The principle does not extend to conduct which
was only incidentally or peripherally associated with an
operation and which escaped from the State’s direction or
control.
(4) The degree of control which must be exercised by
the State in order for the conduct to be attributable to
it was a key issue in the Military and Paramilitary Activities
in and against Nicaragua case. The question was
whether the conduct of the contras was attributable to the
United States so as to hold the latter generally responsible
for breaches of international humanitarian law committed
by the contras. This was analysed by ICJ in terms of
the notion of “control”. On the one hand, it held that the
United States was responsible for the “planning, direction
and support” given by the United States to Nicaraguan
operatives.155 But it rejected the broader claim of Nicaragua
that all the conduct of the contras was attributable
to the United States by reason of its control over them. It
concluded that:
[D]espite the heavy subsidies and other support provided to them by
the United States, there is no clear evidence of the United States having
actually exercised such a degree of control in all fields as to justify
treating the contras as acting on its behalf.
…
All the forms of United States participation mentioned above, and even
the general control by the respondent State over a force with a high
degree of dependency on it, would not in themselves mean, without
further evidence, that the United States directed or enforced the perpetration
of the acts contrary to human rights and humanitarian law
alleged by the applicant State. Such acts could well be committed by
members of the contras without the control of the United States. For
this conduct to give rise to legal responsibility of the United States, it
would in principle have to be proved that that State had effective control
of the military or paramilitary operations in the course of which the
alleged violations were committed.156
Thus while the United States was held responsible for its
own support for the contras, only in certain individual
instances were the acts of the contras themselves held
attributable to it, based upon actual participation of and
directions given by that State. The Court confirmed that
a general situation of dependence and support would be
155 Military and Paramilitary Activities in and against Nicaragua
(see footnote 36 above), p. 51, para. 86.
156 Ibid., pp. 62 and 64–65, paras. 109 and 115. See also the concurring
opinion of Judge Ago, ibid., p. 189, para. 17.
Annex 182
48 Report of the International Law Commission on the work of its fifty-third session
insufficient to justify attribution of the conduct to the
State.
(5) The Appeals Chamber of the International Tribunal
for the Former Yugoslavia has also addressed these issues.
In the Tadi´c, case, the Chamber stressed that:
The requirement of international law for the attribution to States of acts
performed by private individuals is that the State exercises control over
the individuals. The degree of control may, however, vary according
to the factual circumstances of each case. The Appeals Chamber fails
to see why in each and every circumstance international law should
require a high threshold for the test of control.157
The Appeals Chamber held that the requisite degree of
control by the Yugoslavian “authorities over these armed
forces required by international law for considering the
armed conflict to be international was overall control
going beyond the mere financing and equipping of such
forces and involving also participation in the planning
and supervision of military operations”.158 In the course
of their reasoning, the majority considered it necessary to
disapprove the ICJ approach in the Military and Paramilitary
Activities in and against Nicaragua case. But the legal
issues and the factual situation in the Tadi´c case were different
from those facing the Court in that case. The tribunal’s
mandate is directed to issues of individual criminal
responsibility, not State responsibility, and the question in
that case concerned not responsibility but the applicable
rules of international humanitarian law.159 In any event it
is a matter for appreciation in each case whether particular
conduct was or was not carried out under the control
of a State, to such an extent that the conduct controlled
should be attributed to it.160
(6) Questions arise with respect to the conduct of companies
or enterprises which are State-owned and controlled.
If such corporations act inconsistently with the international
obligations of the State concerned the question
arises whether such conduct is attributable to the State. In
discussing this issue it is necessary to recall that international
law acknowledges the general separateness of corporate
entities at the national level, except in those cases
where the “corporate veil” is a mere device or a vehicle
for fraud or evasion.161 The fact that the State initially establishes
a corporate entity, whether by a special law or
otherwise, is not a sufficient basis for the attribution to
the State of the subsequent conduct of that entity.162 Since
157 Prosecutor v. Duško Tadi´c, International Tribunal for the Former
Yugoslavia, Case IT-94-1-A (1999), ILM, vol. 38, No. 6 (November
1999), p. 1518, at p. 1541, para. 117. For the judgment of the Trial
Chamber (Case IT-94-1-T (1997)), see ILR, vol. 112, p. 1.
158 ILM, vol. 38, No. 6 (November 1999), p. 1546, para. 145.
159 See the explanation given by Judge Shahabuddeen, ibid.,
pp. 1614–1615.
160 The problem of the degree of State control necessary for the
purposes of attribution of conduct to the State has also been dealt with,
for example, by the Iran-United States Claims Tribunal and the European
Court of Human Rights: Yeager (see footnote 101 above), p. 103.
See also Starrett Housing Corporation v. Government of the Islamic
Republic of Iran, Iran-U.S. C.T.R., vol. 4, p. 122, at p. 143 (1983);
Loizidou v. Turkey, Merits, Eur. Court H.R., Reports, 1996–VI, p. 2216,
at pp. 2235–2236, para. 56, also p. 2234, para. 52; and ibid., Preliminary
Objections, Eur. Court H.R., Series A, No. 310, p. 23, para. 62
(1995).
161 Barcelona Traction (see footnote 25 above), p. 39, paras. 56–58.
162 For example, the Workers’ Councils considered in Schering
Corporation v. The Islamic Republic of Iran, Iran-U.S. C.T.R.,
corporate entities, although owned by and in that sense
subject to the control of the State, are considered to be
separate, prima facie their conduct in carrying out their
activities is not attributable to the State unless they are
exercising elements of governmental authority within
the meaning of article 5. This was the position taken, for
example, in relation to the de facto seizure of property by
a State-owned oil company, in a case where there was no
proof that the State used its ownership interest as a vehicle
for directing the company to seize the property.163 On the
other hand, where there was evidence that the corporation
was exercising public powers,164 or that the State was using
its ownership interest in or control of a corporation
specifically in order to achieve a particular result,165 the
conduct in question has been attributed to the State.166
(7) It is clear then that a State may, either by specific
directions or by exercising control over a group, in
effect assume responsibility for their conduct. Each case
will depend on its own facts, in particular those concerning
the relationship between the instructions given or the
direction or control exercised and the specific conduct
complained of. In the text of article 8, the three terms “instructions”,
“direction” and “control” are disjunctive; it is
sufficient to establish any one of them. At the same time
it is made clear that the instructions, direction or control
must relate to the conduct which is said to have amounted
to an internationally wrongful act.
(8) Where a State has authorized an act, or has exercised
direction or control over it, questions can arise as to the
State’s responsibility for actions going beyond the scope
of the authorization. For example, questions might arise
if the agent, while carrying out lawful instructions or
directions, engages in some activity which contravenes
both the instructions or directions given and the international
obligations of the instructing State. Such cases
can be resolved by asking whether the unlawful or unauthorized
conduct was really incidental to the mission or
clearly went beyond it. In general a State, in giving lawful
instructions to persons who are not its organs, does not
assume the risk that the instructions will be carried out in
an internationally unlawful way. On the other hand, where
persons or groups have committed acts under the effective
control of a State, the condition for attribution will still be
met even if particular instructions may have been ignored.
vol. 5, p. 361 (1984); Otis Elevator Company v. The Islamic Republic
of Iran, ibid., vol. 14, p. 283 (1987); and Eastman Kodak Company v.
The Government of Iran, ibid., vol. 17, p. 153 (1987).
163 SEDCO, Inc. v. National Iranian Oil Company, ibid., vol. 15,
p. 23 (1987). See also International Technical Products Corporation
v. The Government of the Islamic Republic of Iran, ibid., vol. 9, p. 206
(1985); and Flexi-Van Leasing, Inc. v. The Government of the Islamic
Republic of Iran, ibid., vol. 12, p. 335, at p. 349 (1986).
164 Phillips Petroleum Company Iran v. The Islamic Republic of Iran,
ibid., vol. 21, p. 79 (1989); and Petrolane (see footnote 149 above).
165 Foremost Tehran, Inc. v. The Government of the Islamic Republic
of Iran, Iran-U.S. ibid., vol. 10, p. 228 (1986); and American Bell
International Inc. v. The Islamic Republic of Iran, ibid., vol. 12, p. 170
(1986).
166 See Hertzberg et al. v. Finland (Official Records of the General
Assembly, Thirty-seventh Session, Supplement No. 40 (A/37/40),
annex XIV, communication No. R.14/61, p. 161, at p. 164, para. 9.1)
(1982). See also X v. Ireland, application No. 4125/69, Yearbook of the
European Convention on Human Rights, 1971, vol. 14 (1973), p. 199;
and Young, James and Webster v. the United Kingdom, Eur. Court H.R.,
Series A, No. 44 (1981).
Annex 182
State responsibility 49
The conduct will have been committed under the control
of the State and it will be attributable to the State in accordance
with article 8.
(9) Article 8 uses the words “person or group of persons”,
reflecting the fact that conduct covered by the article
may be that of a group lacking separate legal personality
but acting on a de facto basis. Thus, while a State may
authorize conduct by a legal entity such as a corporation,
it may also deal with aggregates of individuals or groups
that do not have legal personality but are nonetheless acting
as a collective.
Article 9. Conduct carried out in the absence
or default of the official authorities
The conduct of a person or group of persons shall
be considered an act of a State under international law
if the person or group of persons is in fact exercising
elements of the governmental authority in the absence
or default of the official authorities and in circumstances
such as to call for the exercise of those elements of
authority.
Commentary
(1) Article 9 deals with the exceptional case of conduct
in the exercise of elements of the governmental authority
by a person or group of persons acting in the absence of the
official authorities and without any actual authority to do
so. The exceptional nature of the circumstances envisaged
in the article is indicated by the phrase “in circumstances
such as to call for”. Such cases occur only rarely, such as
during revolution, armed conflict or foreign occupation,
where the regular authorities dissolve, are disintegrating,
have been suppressed or are for the time being inoperative.
They may also cover cases where lawful authority is
being gradually restored, e.g. after foreign occupation.
(2) The principle underlying article 9 owes something to
the old idea of the levée en masse, the self-defence of the
citizenry in the absence of regular forces:167 in effect it is
a form of agency of necessity. Instances continue to occur
from time to time in the field of State responsibility. Thus,
the position of the Revolutionary Guards or “Komitehs”
immediately after the revolution in the Islamic Republic
of Iran was treated by the Iran-United States Claims Tribunal
as covered by the principle expressed in article 9.
Yeager concerned, inter alia, the action of performing immigration,
customs and similar functions at Tehran airport
in the immediate aftermath of the revolution. The tribunal
held the conduct attributable to the Islamic Republic of
Iran, on the basis that, if it was not actually authorized by
the Government, then the Guards:
167 This principle is recognized as legitimate by article 2 of the Regulations
respecting the Laws and Customs of War on Land (annexed to
the Hague Conventions II of 1899 and IV of 1907 respecting the Laws
and Customs of War on Land); and by article 4, paragraph A (6), of the
Geneva Convention relative to the Treatment of Prisoners of War of
12 August 1949.
at least exercised elements of governmental authority in the absence of
official authorities, in operations of which the new Government must
have had knowledge and to which it did not specifically object.168
(3) Article 9 establishes three conditions which must be
met in order for conduct to be attributable to the State:
first, the conduct must effectively relate to the exercise of
elements of the governmental authority, secondly, the conduct
must have been carried out in the absence or default
of the official authorities, and thirdly, the circumstances
must have been such as to call for the exercise of those
elements of authority.
(4) As regards the first condition, the person or group
acting must be performing governmental functions, though
they are doing so on their own initiative. In this respect,
the nature of the activity performed is given more weight
than the existence of a formal link between the actors and
the organization of the State. It must be stressed that the
private persons covered by article 9 are not equivalent to
a general de facto Government. The cases envisaged by
article 9 presuppose the existence of a Government in office
and of State machinery whose place is taken by irregulars
or whose action is supplemented in certain cases.
This may happen on part of the territory of a State which
is for the time being out of control, or in other specific
circumstances. A general de facto Government, on the
other hand, is itself an apparatus of the State, replacing
that which existed previously. The conduct of the organs
of such a Government is covered by article 4 rather than
article 9.169
(5) In respect of the second condition, the phrase “in the
absence or default of ” is intended to cover both the situation
of a total collapse of the State apparatus as well as
cases where the official authorities are not exercising their
functions in some specific respect, for instance, in the case
of a partial collapse of the State or its loss of control over a
certain locality. The phrase “absence or default” seeks to
capture both situations.
(6) The third condition for attribution under article 9
requires that the circumstances must have been such as
to call for the exercise of elements of the governmental
authority by private persons. The term “call for” conveys
the idea that some exercise of governmental functions was
called for, though not necessarily the conduct in question.
In other words, the circumstances surrounding the exercise
of elements of the governmental authority by private
persons must have justified the attempt to exercise police
or other functions in the absence of any constituted authority.
There is thus a normative element in the form of
agency entailed by article 9, and this distinguishes these
situations from the normal principle that conduct of private
parties, including insurrectionary forces, is not attributable
to the State.170
168 Yeager (see footnote 101 above), p. 104, para. 43.
169 See, e.g., the award of 18 October 1923 by Arbitrator Taft in the
Tinoco case (footnote 87 above), pp. 381–382. On the responsibility
of the State for the conduct of de facto Governments, see also J. A.
Frowein, Das de facto-Regime im Völkerrecht (Cologne, Heymanns,
1968), pp. 70–71. Conduct of a Government in exile might be covered
by article 9, depending on the circumstances.
170 See, e.g., the Sambiaggio case, UNRIAA, vol. X (Sales
No. 60.V.4), p. 499, at p. 512 (1904); see also article 10 and
commentary.
Annex 182
50 Report of the International Law Commission on the work of its fifty-third session
Article 10. Conduct of an insurrectional
or other movement
1. The conduct of an insurrectional movement
which becomes the new Government of a State shall
be considered an act of that State under international
law.
2. The conduct of a movement, insurrectional or
other, which succeeds in establishing a new State in
part of the territory of a pre-existing State or in a territory
under its administration shall be considered an
act of the new State under international law.
3. This article is without prejudice to the attribution
to a State of any conduct, however related to that
of the movement concerned, which is to be considered
an act of that State by virtue of articles 4 to 9.
Commentary
(1) Article 10 deals with the special case of attribution
to a State of conduct of an insurrectional or other movement
which subsequently becomes the new Government
of the State or succeeds in establishing a new State.
(2) At the outset, the conduct of the members of the
movement presents itself purely as the conduct of private
individuals. It can be placed on the same footing as that of
persons or groups who participate in a riot or mass demonstration
and it is likewise not attributable to the State.
Once an organized movement comes into existence as a
matter of fact, it will be even less possible to attribute its
conduct to the State, which will not be in a position to
exert effective control over its activities. The general principle
in respect of the conduct of such movements, committed
during the continuing struggle with the constituted
authority, is that it is not attributable to the State under
international law. In other words, the acts of unsuccessful
insurrectional movements are not attributable to the State,
unless under some other article of chapter II, for example
in the special circumstances envisaged by article 9.
(3) Ample support for this general principle is found
in arbitral jurisprudence. International arbitral bodies,
including mixed claims commissions171 and arbitral tribunals172
have uniformly affirmed what Commissioner
Nielsen in the Solis case described as a “well-established
principle of international law”, that no Government can
be held responsible for the conduct of rebellious groups
committed in violation of its authority, where it is itself
guilty of no breach of good faith, or of no negligence in
suppressing insurrection.173 Diplomatic practice is remarkably
consistent in recognizing that the conduct of an
171 See the decisions of the various mixed commissions: Zuloaga
and Miramon Governments, Moore, History and Digest, vol. III,
p. 2873; McKenny case, ibid., p. 2881; Confederate States, ibid., p. 2886;
Confederate Debt, ibid., p. 2900; and Maximilian Government, ibid.,
p. 2902, at pp. 2928–2929.
172 See, e.g., British Claims in the Spanish Zone of Morocco
(footnote 44 above), p. 642; and the Iloilo Claims, UNRIAA, vol. VI
(Sales No. 1955.V.3), p. 158, at pp. 159–160 (1925).
173 UNRIAA, vol. IV (Sales No. 1951.V.1), p. 358, at p. 361 (1928)
(referring to Home Frontier and Foreign Missionary Society, ibid.,
vol. VI (Sales No. 1955.V.3), p. 42 (1920)); cf. the Sambiaggio case
(footnote 170 above), p. 524.
insurrectional movement cannot be attributed to the State.
This can be seen, for example, from the preparatory work
for the 1930 Hague Conference. Replies of Governments
to point IX of the request for information addressed to
them by the Preparatory Committee indicated substantial
agreement that: (a) the conduct of organs of an insurrectional
movement could not be attributed as such to the
State or entail its international responsibility; and (b) only
conduct engaged in by organs of the State in connection
with the injurious acts of the insurgents could be attributed
to the State and entail its international responsibility,
and then only if such conduct constituted a breach of an
international obligation of that State.174
(4) The general principle that the conduct of an insurrectional
or other movement is not attributable to the State
is premised on the assumption that the structures and organization
of the movement are and remain independent
of those of the State. This will be the case where the State
successfully puts down the revolt. In contrast, where the
movement achieves its aims and either installs itself as the
new Government of the State or forms a new State in part
of the territory of the pre-existing State or in a territory
under its administration, it would be anomalous if the new
regime or new State could avoid responsibility for conduct
earlier committed by it. In these exceptional circumstances,
article 10 provides for the attribution of the conduct
of the successful insurrectional or other movement
to the State. The basis for the attribution of conduct of a
successful insurrectional or other movement to the State
under international law lies in the continuity between the
movement and the eventual Government. Thus the term
“conduct” only concerns the conduct of the movement as
such and not the individual acts of members of the movement,
acting in their own capacity.
(5) Where the insurrectional movement, as a new Government,
replaces the previous Government of the State,
the ruling organization of the insurrectional movement
becomes the ruling organization of that State. The continuity
which thus exists between the new organization of
the State and that of the insurrectional movement leads
naturally to the attribution to the State of conduct which
the insurrectional movement may have committed during
the struggle. In such a case, the State does not cease to
exist as a subject of international law. It remains the same
State, despite the changes, reorganizations and adaptations
which occur in its institutions. Moreover, it is the
only subject of international law to which responsibility
can be attributed. The situation requires that acts committed
during the struggle for power by the apparatus of
the insurrectional movement should be attributable to the
State, alongside acts of the then established Government.
(6) Where the insurrectional or other movement succeeds
in establishing a new State, either in part of the
territory of the pre-existing State or in a territory which
was previously under its administration, the attribution to
the new State of the conduct of the insurrectional or other
movement is again justified by virtue of the continuity be-
174 League of Nations, Conference for the Codification of International
Law, Bases of Discussion … (see footnote 88 above), p. 108;
and Supplement to Volume III … (see footnote 104 above), pp. 3
and 20.
Annex 182
State responsibility 51
tween the organization of the movement and the organization
of the State to which it has given rise. Effectively the
same entity which previously had the characteristics of an
insurrectional or other movement has become the Government
of the State it was struggling to establish. The predecessor
State will not be responsible for those acts. The
only possibility is that the new State be required to assume
responsibility for conduct committed with a view to its
own establishment, and this represents the accepted rule.
(7) Paragraph 1 of article 10 covers the scenario in
which the insurrectional movement, having triumphed,
has substituted its structures for those of the previous
Government of the State in question. The phrase “which
becomes the new Government” is used to describe this
consequence. However, the rule in paragraph 1 should not
be pressed too far in the case of Governments of national
reconciliation, formed following an agreement between
the existing authorities and the leaders of an insurrectional
movement. The State should not be made responsible
for the conduct of a violent opposition movement merely
because, in the interests of an overall peace settlement,
elements of the opposition are drawn into a reconstructed
Government. Thus, the criterion of application of paragraph
1 is that of a real and substantial continuity between
the former insurrectional movement and the new Government
it has succeeded in forming.
(8) Paragraph 2 of article 10 addresses the second scenario,
where the structures of the insurrectional or other
revolutionary movement become those of a new State,
constituted by secession or decolonization in part of the
territory which was previously subject to the sovereignty
or administration of the predecessor State. The expression
“or in a territory under its administration” is included in
order to take account of the differing legal status of different
dependent territories.
(9) A comprehensive definition of the types of groups
encompassed by the term “insurrectional movement” as
used in article 10 is made difficult by the wide variety
of forms which insurrectional movements may take in
practice, according to whether there is relatively limited
internal unrest, a genuine civil war situation, an anti-colonial
struggle, the action of a national liberation front,
revolutionary or counter-revolutionary movements and
so on. Insurrectional movements may be based in the territory
of the State against which the movement’s actions
are directed, or on the territory of a third State. Despite
this diversity, the threshold for the application of the laws
of armed conflict contained in the Protocol Additional to
the Geneva Conventions of 12 August 1949, and relating
to the protection of victims of non-international armed
conflicts (Protocol II) may be taken as a guide. Article
1, paragraph 1, refers to “dissident armed forces or other
organized armed groups which, under responsible command,
exercise such control over a part of [the relevant
State’s] territory as to enable them to carry out sustained
and concerted military operations and to implement this
Protocol”, and it contrasts such groups with “situations of
internal disturbances and tensions, such as riots, isolated
and sporadic acts of violence and other acts of a similar
nature” (art. 1, para. 2). This definition of “dissident
armed forces” reflects, in the context of the Protocols, the
essential idea of an “insurrectional movement”.
(10) As compared with paragraph 1, the scope of the
attribution rule articulated by paragraph 2 is broadened to
include “insurrectional or other” movements. This terminology
reflects the existence of a greater variety of movements
whose actions may result in the formation of a new
State. The words do not, however, extend to encompass
the actions of a group of citizens advocating separation or
revolution where these are carried out within the framework
of the predecessor State. Nor does it cover the situation
where an insurrectional movement within a territory
succeeds in its agitation for union with another State. This
is essentially a case of succession, and outside the scope
of the articles, whereas article 10 focuses on the continuity
of the movement concerned and the eventual new
Government or State, as the case may be.
(11) No distinction should be made for the purposes of
article 10 between different categories of movements on
the basis of any international “legitimacy” or of any illegality
in respect of their establishment as a Government,
despite the potential importance of such distinctions in
other contexts.175 From the standpoint of the formulation
of rules of law governing State responsibility, it is unnecessary
and undesirable to exonerate a new Government
or a new State from responsibility for the conduct of its
personnel by reference to considerations of legitimacy or
illegitimacy of its origin.176 Rather, the focus must be on
the particular conduct in question, and on its lawfulness or
otherwise under the applicable rules of international law.
(12) Arbitral decisions, together with State practice and
the literature, indicate a general acceptance of the two
positive attribution rules in article 10. The international
arbitral decisions, e.g. those of the mixed commissions
established in respect of Venezuela (1903) and Mexico
(1920–1930), support the attribution of conduct by insurgents
where the movement is successful in achieving its
revolutionary aims. For example, in the Bolívar Railway
Company claim, the principle is stated in the following
terms:
The nation is responsible for the obligations of a successful revolution
from its beginning, because in theory, it represented ab initio a changing
national will, crystallizing in the finally successful result.177
The French-Venezuelan Mixed Claims Commission in
its decision concerning the French Company of Venezuelan
Railroads case emphasized that the State cannot be
held responsible for the acts of revolutionaries “unless the
revolution was successful”, since such acts then involve
the responsibility of the State “under the well-recognized
rules of public law”.178 In the Pinson case, the French-
Mexican Claims Commission ruled that:
175 See H. Atlam, “National liberation movements and international
responsibility”, United Nations Codification of State Responsibility,
B. Simma and M. Spinedi, eds. (New York, Oceana, 1987), p. 35.
176 As ICJ said, “[p]hysical control of a territory, and not sovereignty
or legitimacy of title, is the basis of State liability for acts affecting
other States”, Legal Consequences for States of the Continued
Presence of South Africa in Namibia (South West Africa) notwithstanding
Security Council Resolution 276 (1970), Advisory Opinion
I.C.J. Reports 1971, p. 16, at p. 54, para. 118.
177 UNRIAA, vol. IX (Sales No. 59.V.5), p. 445, at p. 453 (1903).
See also Puerto Cabello and Valencia Railway Company, ibid., p. 510,
at p. 513 (1903).
178 Ibid., vol. X (Sales No. 60.V.4), p. 285, at p. 354 (1902). See also
the Dix case, ibid., vol. IX (Sales No. 59.V.5), p. 119 (1902).
Annex 182
52 Report of the International Law Commission on the work of its fifty-third session
if the injuries originated, for example, in requisitions or forced contributions
demanded ... by revolutionaries before their final success, or if
they were caused ... by offences committed by successful revolutionary
forces, the responsibility of the State ... cannot be denied.179
(13) The possibility of holding the State responsible for
the conduct of a successful insurrectional movement was
brought out in the request for information addressed to
Governments by the Preparatory Committee for the 1930
Hague Conference. On the basis of replies received from
a number of Governments, the Preparatory Committee
drew up the following Basis of Discussion: “A State is responsible
for damage caused to foreigners by an insurrectionist
party which has been successful and has become
the Government to the same degree as it is responsible
for damage caused by acts of the Government de jure or
its officials or troops.” 180 Although the proposition was
never discussed, it may be considered to reflect the rule of
attribution now contained in paragraph 2.
(14) More recent decisions and practice do not, on the
whole, give any reason to doubt the propositions contained
in article 10. In one case, the Supreme Court of
Namibia went even further in accepting responsibility
for “anything done” by the predecessor administration of
South Africa.181
(15) Exceptional cases may occur where the State was
in a position to adopt measures of vigilance, prevention
or punishment in respect of the movement’s conduct but
improperly failed to do so. This possibility is preserved by
paragraph 3 of article 10, which provides that the attribution
rules of paragraphs 1 and 2 are without prejudice to
the attribution to a State of any conduct, however related
to that of the movement concerned, which is to be considered
an act of that State by virtue of other provisions in
chapter II. The term “however related to that of the movement
concerned” is intended to have a broad meaning.
Thus, the failure by a State to take available steps to protect
the premises of diplomatic missions, threatened from
attack by an insurrectional movement, is clearly conduct
attributable to the State and is preserved by paragraph 3.
(16) A further possibility is that the insurrectional movement
may itself be held responsible for its own conduct
under international law, for example for a breach of international
humanitarian law committed by its forces. The
topic of the international responsibility of unsuccessful
insurrectional or other movements, however, falls outside
the scope of the present articles, which are concerned only
with the responsibility of States.
179 Ibid., vol. V (Sales No. 1952.V.3), p. 327, at p. 353 (1928).
180 League of Nations, Conference for the Codification of International
Law, Bases of Discussion … (see footnote 88 above), pp. 108
and 116; and Basis of discussion No. 22 (c), ibid., p. 118; reproduced in
Yearbook ... 1956, vol. II, p. 223, at p. 224, document A/CN.4/96.
181 Guided in particular by a constitutional provision, the Supreme
Court of Namibia held that “the new government inherits responsibility
for the acts committed by the previous organs of the State”, Minister
of Defence, Namibia v. Mwandinghi, South African Law Reports,
1992 (2), p. 355, at p. 360; and ILR, vol. 91, p. 341, at p. 361. See, on
the other hand, 44123 Ontario Ltd. v. Crispus Kiyonga and Others,
11 Kampala Law Reports 14, pp. 20–21 (1992); and ILR, vol. 103,
p. 259, at p. 266 (High Court, Uganda).
Article 11. Conduct acknowledged and
adopted by a State as its own
Conduct which is not attributable to a State under
the preceding articles shall nevertheless be considered
an act of that State under international law if and to
the extent that the State acknowledges and adopts the
conduct in question as its own.
Commentary
(1) All the bases for attribution covered in chapter II,
with the exception of the conduct of insurrectional or other
movements under article 10, assume that the status of
the person or body as a State organ, or its mandate to act
on behalf of the State, are established at the time of the
alleged wrongful act. Article 11, by contrast, provides for
the attribution to a State of conduct that was not or may
not have been attributable to it at the time of commission,
but which is subsequently acknowledged and adopted by
the State as its own.
(2) In many cases, the conduct which is acknowledged
and adopted by a State will be that of private persons or
entities. The general principle, drawn from State practice
and international judicial decisions, is that the conduct
of a person or group of persons not acting on behalf of
the State is not considered as an act of the State under
international law. This conclusion holds irrespective of
the circumstances in which the private person acts and of
the interests affected by the person’s conduct.
(3) Thus, like article 10, article 11 is based on the principle
that purely private conduct cannot as such be attributed
to a State. But it recognizes “nevertheless” that conduct
is to be considered as an act of a State “if and to the
extent that the State acknowledges and adopts the conduct
in question as its own”. Instances of the application of
the principle can be found in judicial decisions and State
practice. For example, in the Lighthouses arbitration, a
tribunal held Greece liable for the breach of a concession
agreement initiated by Crete at a period when the latter
was an autonomous territory of the Ottoman Empire,
partly on the basis that the breach had been “endorsed
by [Greece] as if it had been a regular transaction … and
eventually continued by her, even after the acquisition of
territorial sovereignty over the island”.182 In the context
of State succession, it is unclear whether a new State succeeds
to any State responsibility of the predecessor State
with respect to its territory.183 However, if the successor
State, faced with a continuing wrongful act on its territory,
endorses and continues that situation, the inference
may readily be drawn that it has assumed responsibility
for it.
(4) Outside the context of State succession, the United
States Diplomatic and Consular Staff in Tehran case
provides a further example of subsequent adoption by a
182 Affaire relative à la concession des phares de l’Empire ottoman,
UNRIAA, vol. XII (Sales No. 63.V.3), p. 155, at p. 198 (1956).
183 The matter is reserved by article 39 of the Vienna Convention
on Succession of States in respect of Treaties (hereinafter “the 1978
Vienna Convention”).
Annex 182
State responsibility 53
State of particular conduct. There ICJ drew a clear distinction
between the legal situation immediately following the
seizure of the United States embassy and its personnel by
the militants, and that created by a decree of the Iranian
State which expressly approved and maintained the situation.
In the words of the Court:
The policy thus announced by the Ayatollah Khomeini, of maintaining
the occupation of the Embassy and the detention of its inmates as hostages
for the purpose of exerting pressure on the United States Government
was complied with by other Iranian authorities and endorsed by
them repeatedly in statements made in various contexts. The result of
that policy was fundamentally to transform the legal nature of the situation
created by the occupation of the Embassy and the detention of its
diplomatic and consular staff as hostages. The approval given to these
facts by the Ayatollah Khomeini and other organs of the Iranian State,
and the decision to perpetuate them, translated continuing occupation
of the Embassy and detention of the hostages into acts of that State.184
In that case it made no difference whether the effect of the
“approval” of the conduct of the militants was merely prospective,
or whether it made the Islamic Republic of Iran
responsible for the whole process of seizure of the embassy
and detention of its personnel ab initio. The Islamic
Republic of Iran had already been held responsible in relation
to the earlier period on a different legal basis, viz.
its failure to take sufficient action to prevent the seizure or
to bring it to an immediate end.185 In other cases no such
prior responsibility will exist. Where the acknowledgement
and adoption is unequivocal and unqualified there
is good reason to give it retroactive effect, which is what
the tribunal did in the Lighthouses arbitration.186 This is
consistent with the position established by article 10 for
insurrectional movements and avoids gaps in the extent of
responsibility for what is, in effect, the same continuing
act.
(5) As regards State practice, the capture and subsequent
trial in Israel of Adolf Eichmann may provide an
example of the subsequent adoption of private conduct by
a State. On 10 May 1960, Eichmann was captured by a
group of Israelis in Buenos Aires. He was held in captivity
in Buenos Aires in a private home for some weeks before
being taken by air to Israel. Argentina later charged the
Israeli Government with complicity in Eichmann’s capture,
a charge neither admitted nor denied by Israeli Foreign
Minister Golda Meir, during the discussion in the Security
Council of the complaint. She referred to Eichmann’s captors
as a “volunteer group”.187 Security Council resolution
138 (1960) of 23 June 1960 implied a finding that the
Israeli Government was at least aware of, and consented
to, the successful plan to capture Eichmann in Argentina.
It may be that Eichmann’s captors were “in fact acting
on the instructions of, or under the direction or control
of ” Israel, in which case their conduct was more properly
attributed to the State under article 8. But where there are
doubts about whether certain conduct falls within article
8, these may be resolved by the subsequent adoption of
the conduct in question by the State.
184 United States Diplomatic and Consular Staff in Tehran (see
footnote 59 above), p. 35, para. 74.
185 Ibid., pp. 31–33, paras. 63–68.
186 Lighthouses arbitration (see footnote 182 above), pp. 197–198.
187 Official Records of the Security Council, Fifteenth Year, 866th
meeting, 22 June 1960, para. 18.
(6) The phrase “acknowledges and adopts the conduct
in question as its own” is intended to distinguish cases
of acknowledgement and adoption from cases of mere
support or endorsement.188 ICJ in the United States Diplomatic
and Consular Staff in Tehran case used phrases
such as “approval”, “endorsement”, “the seal of official
governmental approval” and “the decision to perpetuate
[the situation]”.189 These were sufficient in the context of
that case, but as a general matter, conduct will not be attributable
to a State under article 11 where a State merely
acknowledges the factual existence of conduct or expresses
its verbal approval of it. In international controversies,
States often take positions which amount to “approval”
or “endorsement” of conduct in some general sense but
do not involve any assumption of responsibility. The language
of “adoption”, on the other hand, carries with it the
idea that the conduct is acknowledged by the State as, in
effect, its own conduct. Indeed, provided the State’s intention
to accept responsibility for otherwise non-attributable
conduct is clearly indicated, article 11 may cover cases
where a State has accepted responsibility for conduct of
which it did not approve, which it had sought to prevent
and which it deeply regretted. However such acceptance
may be phrased in the particular case, the term “acknowledges
and adopts” in article 11 makes it clear that what is
required is something more than a general acknowledgement
of a factual situation, but rather that the State identifies
the conduct in question and makes it its own.
(7) The principle established by article 11 governs the
question of attribution only. Where conduct has been acknowledged
and adopted by a State, it will still be necessary
to consider whether the conduct was internationally
wrongful. For the purposes of article 11, the international
obligations of the adopting State are the criterion for
wrongfulness. The conduct may have been lawful so far
as the original actor was concerned, or the actor may have
been a private party whose conduct in the relevant respect
was not regulated by international law. By the same token,
a State adopting or acknowledging conduct which is lawful
in terms of its own international obligations does not
thereby assume responsibility for the unlawful acts of any
other person or entity. Such an assumption of responsibility
would have to go further and amount to an agreement
to indemnify for the wrongful act of another.
(8) The phrase “if and to the extent that” is intended to
convey a number of ideas. First, the conduct of, in particular,
private persons, groups or entities is not attributable to
the State unless under some other article of chapter II or
unless it has been acknowledged and adopted by the State.
Secondly, a State might acknowledge and adopt conduct
only to a certain extent. In other words, a State may elect
to acknowledge and adopt only some of the conduct in
question. Thirdly, the act of acknowledgment and adoption,
whether it takes the form of words or conduct, must
be clear and unequivocal.
(9) The conditions of acknowledgement and adoption
are cumulative, as indicated by the word “and”. The order
of the two conditions indicates the normal sequence of
188 The separate question of aid or assistance by a State to internationally
wrongful conduct of another State is dealt with in article 16.
189 See footnote 59 above.
Annex 182
54 Report of the International Law Commission on the work of its fifty-third session
events in cases in which article 11 is relied on. Acknowledgement
and adoption of conduct by a State might be
express (as for example in the United States Diplomatic
and Consular Staff in Tehran case), or it might be inferred
from the conduct of the State in question.
CHAPTER III
BREACH OF AN INTERNATIONAL OBLIGATION
Commentary
(1) There is a breach of an international obligation when
conduct attributed to a State as a subject of international
law amounts to a failure by that State to comply with an
international obligation incumbent upon it or, to use the
language of article 2, subparagraph (b), when such conduct
constitutes “a breach of an international obligation
of the State”. This chapter develops the notion of a breach
of an international obligation, to the extent that this is possible
in general terms.
(2) It must be stressed again that the articles do not
purport to specify the content of the primary rules of
international law, or of the obligations thereby created
for particular States.190 In determining whether given
conduct attributable to a State constitutes a breach of its
international obligations, the principal focus will be on
the primary obligation concerned. It is this which has to
be interpreted and applied to the situation, determining
thereby the substance of the conduct required, the standard
to be observed, the result to be achieved, etc. There is
no such thing as a breach of an international obligation in
the abstract, and chapter III can only play an ancillary role
in determining whether there has been such a breach, or
the time at which it occurred, or its duration. Nonetheless,
a number of basic principles can be stated.
(3) The essence of an internationally wrongful act lies in
the non-conformity of the State’s actual conduct with the
conduct it ought to have adopted in order to comply with
a particular international obligation. Such conduct gives
rise to the new legal relations which are grouped under
the common denomination of international responsibility.
Chapter III, therefore, begins with a provision specifying
in general terms when it may be considered that there is a
breach of an international obligation (art. 12). The basic
concept having been defined, the other provisions of the
chapter are devoted to specifying how this concept applies
to various situations. In particular, the chapter deals with
the question of the intertemporal law as it applies to State
responsibility, i.e. the principle that a State is only responsible
for a breach of an international obligation if the obligation
is in force for the State at the time of the breach
(art. 13), with the equally important question of continuing
breaches (art. 14), and with the special problem of determining
whether and when there has been a breach of an
obligation which is directed not at single but at composite
acts, i.e. where the essence of the breach lies in a series of
acts defined in aggregate as wrongful (art. 15).
190 See paragraphs (2) to (4) of the general commentary.
(4) For the reason given in paragraph (2) above, it is
neither possible nor desirable to deal in the framework
of this Part with all the issues that can arise in determining
whether there has been a breach of an international
obligation. Questions of evidence and proof of such a
breach fall entirely outside the scope of the articles. Other
questions concern rather the classification or typology of
international obligations. These have only been included
in the text where they can be seen to have distinct consequences
within the framework of the secondary rules of
State responsibility.191
Article 12. Existence of a breach of an
international obligation
There is a breach of an international obligation by
a State when an act of that State is not in conformity
with what is required of it by that obligation, regardless
of its origin or character.
Commentary
(1) As stated in article 2, a breach by a State of an international
obligation incumbent upon it gives rise to its
international responsibility. It is first necessary to specify
what is meant by a breach of an international obligation.
This is the purpose of article 12, which defines in the
most general terms what constitutes a breach of an international
obligation by a State. In order to conclude that
there is a breach of an international obligation in any specific
case, it will be necessary to take account of the other
provisions of chapter III which specify further conditions
relating to the existence of a breach of an international
obligation, as well as the provisions of chapter V dealing
with circumstances which may preclude the wrongfulness
of an act of a State. But in the final analysis, whether and
when there has been a breach of an obligation depends on
the precise terms of the obligation, its interpretation and
application, taking into account its object and purpose and
the facts of the case.
(2) In introducing the notion of a breach of an international
obligation, it is necessary again to emphasize the
autonomy of international law in accordance with the
principle stated in article 3. In the terms of article 12, the
breach of an international obligation consists in the disconformity
between the conduct required of the State by
that obligation and the conduct actually adopted by the
State—i.e. between the requirements of international law
and the facts of the matter. This can be expressed in different
ways. For example, ICJ has used such expressions as
“incompatibility with the obligations” of a State,192 acts
“contrary to” or “inconsistent with” a given rule,193 and
191 See, e.g., the classification of obligations of conduct and results,
paragraphs (11) to (12) of the commentary to article 12.
192 United States Diplomatic and Consular Staff in Tehran
(see footnote 59 above), p. 29, para. 56.
193 Military and Paramilitary Activities in and against Nicaragua
(see footnote 36 above), p. 64, para. 115, and p. 98, para. 186, respectively.
Annex 182
Volume VIII - Annexes 161-182