Author: Danilo Ruggero Di Bella*
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Introduction
One of the primary purposes of international investment law is the depoliticization of disputes concerning foreign investors and, accordingly, the avoidance of diplomatic protection. However, an international investment law’s standard—the Full and Protection Security (FPS), often found in many Bilateral Investment Treaties (BITs)—may paradoxically lead to the opposite result. In certain situations, the FPS standard may compel the host country to accord legal protection to a foreign investor against the acts of a third State affecting the foreigner’s investment, thus effectively reviving diplomatic protection.
Diplomatic Protection
Pursuant to Article 1 of the International Law Commission’s 2006 Draft Articles on Diplomatic Protection (hereinafter “2006 ILC’s Draft Articles”), a State may exercise diplomatic protection by invoking, through diplomatic action or other means of peaceful settlement, the responsibility of another State for an internationally wrongful act causing an injury to its own nationals with a view of implementing such responsibility.
The exercise of diplomatic protection by a State has two main limitations: nationality and its voluntary basis. Firstly, a State may espouse only the claims of its own nationals against another State, pursuant to Article 3(1) of the 2006 ILC’s Draft Articles. A State could not adopt claims of foreign subjects against a third State. Secondly, as per Article 2 of the 2006 Draft Articles, States have the right to exercise diplomatic protection, meaning there is no obligation for States to provide such protection (even if they may have the duty to protect their nationals).
Full Protection and Security Standard
The FPS clause is an investment protection standard commonly contained in many BITs. The FPS standard imposes on the host state the obligation to take active measures to protect foreign investments physically and legally from adverse effects of third parties as well as State organs. At times, the FPS clause has been equated with another investment protection standard, the fair and equitable treatment (FET). Arguably, the scope of application of the two standards may sometimes overlap to the extent that the absence of full protection and security of an investment automatically entails a treatment that is not fair and equitable, and vice versa.
The legal protection under the FPS standard may be carried out through domestic tribunals when the author of the acts threatening the foreign investment is a private party (such as an insurgent group) or a state organ. If the adverse effects stem from a third State instead, the legal protection pursuant to the FPS clause may be presumably carried out through resorting to international tribunals or other means of peaceful settlement, which basically translates into diplomatic protection.
As the FPS applies to legally protect foreign investment from the actions of insurgents—which are subjects of international law—then the FPS may also apply to prevent the actions of other subjects of international law, such as a third State.
This analysis is not, however, concerned with scenarios in which two States are at war and one of the two may have the obligation under an applicable BIT to protect physically foreign investments from the military attacks of the other state (for instance, like in the recent 2020 Armenia-Azerbaijan conflict which seems to have given rise to possible investment arbitration claims). This analysis is instead confined to legal protection since such protection can be exercised—just as diplomatic protection—through means of peaceful settlement of disputes. This is why the legal protection—that the host state shall accord under the FPS standard to a foreign investor—may assume the same features as diplomatic protection when it is directed at preventing a third State from interfering with a foreign investor’s investment.
Circumventing Diplomatic Protection Limitations
Given the resemblance between the two protections by means of peaceful dispute resolution mechanisms, could investment law overcome, on certain occasions, the two above-mentioned diplomatic protection constraints (i.e., nationality requirement and voluntary basis)? In other words, could investment law allow for mandatory diplomatic protection by a host-State of foreign subjects? For example, in a hypothetical situation in which a foreigner’s investment is undermined by the acts of a third State (which in turn constitute a breach of the latter’s international obligations), the host-State may be obliged to accord diplomatic protection to the foreign investor where the applicable BIT contains an FPS clause or a most-favored-nation clause (MFN clause) capable of importing an FPS provision from a third BIT. It appears three conditions need to be fulfilled in order for this to happen:
1) the third-State’s action or omission causing an injury to the foreign investor is in itself an internationally wrongful act of that state, meaning the third state is breaching its conventional or customary international obligations by interfering with the foreign investor;
2) the host-State’s omission to provide diplomatic protection may constitute a breach of the host-State’s conventional obligation to proactively protect foreign investments pursuant to an FPS clause contained in the BIT between the foreign investor’s home-State and the host-State;
3) there should be a link between the third-State’s wrongful act and the foreigner’s investment warranting the protection at the hand of the state hosting that investment, in the sense that the third state directly affects the normal ability of the investor’s business to function.
A Practical Example
Although it may appear difficult to imagine a situation in which these three conditions materialize, incidentally, reality is more creative than imagination itself. It is indeed possible to bring forward a real-life example.
In 2013, Spain began granting the trawler Adexe Primero fishing permits to catch snow crabs around the Svalbard archipelago. The shipowner of the Adexe Primero is Mariscos Polar SL, a company incorporated in Spain but owned by Moldavian and Russian citizens. Spain’s fishing permits to harness snow crabs in Svalbard waters were based on the 1920 Treaty of Paris, which provides all Contracting Parties’ nationals with commercial access to the natural resources of Svalbard on the same footing as Norwegians. This treaty was meant to partially preserve the terra nullius status that the archipelago enjoyed (and, accordingly, the acquired rights of the international community) before being ceded to Norway. As of 2015, Norway began implementing a series of measures thwarting non-Norwegian vessels’ commercial activities in Svalbard, thus contravening its obligations under the Treaty of Paris to enable all nationals of the Signatories to that treaty to practice the same economic activities on a footing of absolute equality with Norwegians.
Norway’s violation of the Treaty of Svalbard—on which Spain’s fishing permits were based—and Spain’s subsequent failure to protect the legal validity of such permits (whose ultimate beneficiaries were Moldavian and Russian citizens) may serve as a practical example for our purposes.
The Moldavian and Russian citizens may rely on international investment law to prompt Spain to accord them diplomatic protection against Norway. Precisely, these foreign investors have invoked the Spain-Moldova BIT and Spain-Russia BIT to initiate an investment arbitration against Spain. In these investment arbitrations, the Moldavian and Russian investors may claim the breach of the FPS standard and request Spain to provide adequate legal protection against Norway’s subsequent claims to the fishing rights that Spain granted to them in the first place. As Spain failed to accord any legal protection to its foreign investors to ensure the normal ability of their business to function, Spain is in breach of the FPS standard.
In the case of the Russian investor, the FPS claim may be put forward by broadening the scope of the dispute resolution provision of the Spain-Russia BIT through its MFN clause, thus importing from another Spain’s BIT a broader dispute resolution provision covering not only expropriation claims (such as the Spain-Lebanon BIT). Meanwhile, the Moldovan investor would not need to invoke the MFN clause for this purpose since the dispute resolution provision of the Spain-Moldova BIT is not limited to expropriation claims.
Specifically, the foreign investors may request Spain to protect their permit to harness snow crabs in Svalbard’s waters by resorting to the 1929 Spain-Norway Treaty on Conciliation, Judicial Settlement and Arbitration. This is one of the many bilateral treaties that Spain concluded in the 1920s, providing for a general compromissory clause to settle any future dispute by a Permanent Conciliation Commission and—failing an amicable settlement—by recourse to the Permanent Court of International Justice (the predecessor of the International Court of Justice) or to an ad hoc arbitral tribunal.
Incidentally, Spain is committing the very same infringement it was accusing the EU Commission of committing, i.e., the failure to act in defense of EU fishing rights by initiating international legal proceedings against Norway. Back in 2018, Spain joined Latvia in an action against the EU Commission before the Court of Justice of the European Union (CJEU) for failing to act under Article 265 TFEU to the extent that the EU Commission had not brought international judicial proceedings against Norway (upon Latvia’s request) to secure EU’s fishing rights in Svalbard waters. On 30 January 2020, the CJEU declared Latvia and Spain’s application inadmissible as the EU Commission would not have been able to bring any international judicial proceedings against Norway for several procedural obstacles, including the fact that while a number of EU Member States are Party to the 1920 Treaty of Paris, the EU is not. The EU has no general arbitration agreement with Norway.
Now, instead, the EU Commission may bring an action against Spain on the very same grounds under article 258 TFEU for failing to fulfill the obligations under the EU Treaties and regulations in accordance with the principle of sincere cooperation among the Union and the other Member States in carrying out the tasks which flow from the Treaties as set in article 4.3(2) TEU. Spain’s failure to protect EU fishing rights in Svalbard—as set in EU Regulations—is producing acquiescence relinquishing its international rights on Svalbard’s natural resources, which in turn is damaging all EU operators in the snow crab fishery in Svalbard to the extent that Spain’s acquiescence contributes to consolidate Norway’s discriminatory interpretation of the Treaty of Paris.
Unlike the previous action brought by Spain against the EU Commission, Spain will be unable to object to procedural obstacles that prevent it from bringing international judicial proceedings against Norway to secure the EU’s fishing rights in Svalbard, since Spain and Norway have a general arbitration treaty in place. Accordingly, Spain is in the position to protect the EU’s fishing rights in Svalbard waters by initiating an international arbitration against Norway by invoking the 1929 Spain-Norway Treaty on Conciliation, Judicial Settlement, and Arbitration (as procedural treaty providing for arbitration) in conjunction with the 1920 Treaty of Paris (as substantive treaty).
Arguably, Spain is contravening the maxim of customary international law of “venire contra factum proprium non valet.” Spain is acting in contradiction to its previous conduct. While in 2018 Spain requested the EU Commission to initiate international legal proceedings against Norway to protect EU fishing rights in Svalbard, now Spain appears unwilling to initiate such proceedings despite being in the position to do so.
Importantly, not just the EU Commission may initiate this infringement procedure against Spain. Also, Latvia, Estonia, Lithuania, and Poland—that is, the other EU Member States issuing licenses for fishing snow-crabs in Svalbard waters whose fishing enterprises have been affected by Spain’s acquiescence—may bring the same action against Spain under article 259 TFEU.
Checking Boxes
This concrete example would check all three conditions mentioned above in section C) of this analysis.
Firstly, Norway’s acts of allowing only Norwegians to pursue the catch of snow crabs in Svalbard, while discriminatorily forbidding foreign vessels operating with non-Norwegian permits to do the same, constitutes a breach of the Treaty of Paris. Accordingly, this constitutes in itself an internationally wrongful act for Norway.
Secondly, Spain’s failure to legally protect the Moldavian and Russian investors against Norway’s wrongful acts constitutes a breach under the Spain-Moldova BIT and Spain-Russia BIT. Additionally, Spain’s failure to secure the EU’s fishing rights in Svalbard also amounts to a breach of EU law under articles 258 TFEU and 4.3(2) TEU.
Thirdly, there is a link between Norway’s breach of the Svalbard Treaty and its impact on the foreign investors’ company in Spain, whose purpose is to catch snow-crabs in arctic waters underpinned by Spanish permits. Such a clear link warrants protection by Spain. Indeed, Norway is impeding the regular operation of Moldavian and Russian investments in Spain.
Clarifications and Conclusion
Two clarifications are needed to resize the relevance of this analysis as to how the FPS standard may ease the two constraints of diplomatic protection (nationality requirement and voluntary nature).
Firstly, a ship’s flag state may always exercise diplomatic protection, regardless of who owns the ship (whether the owner is its national or a foreigner). Therefore, Spain may have accorded diplomatic protection to the trawler flying the Spanish flag (the Adexe Primero), even if the vessel is owned by Moldavian and Russian nationals. Indeed, according to Article 292(2) of the UNCLOS, it is up to the state whose flag a vessel is entitled to fly to accord diplomatic protection.
Secondly, the state where a company is incorporated can exercise diplomatic protection in accordance with Article 9 of the 2006 ILC’s Draft Articles, irrespective of where its shareholders may come from. Hence, Spain may have protected Mariscos Polar SL simply because it is registered in Spain, even if its shareholders are from Moldovia and Russia. After all, Spain would protect the national interests underlying its fishing rights in Svalbard. This is also in line with the findings of the International Court of Justice in the Barcelona Traction case, according to which the state of incorporation of a company—whose interests have been affected—has jus standi to exercise diplomatic protection (ICJ Judgment of 5 February 1970 in Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain) at paras 74-84).
So, in reality, the FPS standard is not actually necessary to indirectly extend the diplomatic protection of a given state to citizens of another state, thus easing the requirement regarding the match between the nationality of the injured subjects and the state providing the protection. However, the FPS does have a bearing in making the provision of diplomatic protection compulsory (or at least not wholly voluntary). Should Spain refuse to accord diplomatic protection to the vessel flying its flag (the Adexe Primero) and to a company incorporated under its laws (Mariscos Polar SL), Spain would be breaching the obligation under the FPS clause to accord legal protection to the Moldavian and Russian investors. As such, Spain may be compelled to accord such diplomatic protection by an investment arbitration tribunal and, alternatively or complementary, be ordered to compensate the foreign investors for such breach. Hence, the FPS clause may circumvent the constraint concerning the voluntary basis of diplomatic protection by making it essentially quasi-mandatory.
*Danilo Ruggero Di Bella is an attorney-at-law, member of the Madrid Bar and the Canadian Institute for International Law Expertise (CIFILE), leading the boutique law firm Bottega Di Bella. Danilo focuses his practice on complex international commercial and investment arbitrations.