von Prof. Dr. Anne van Aaken*
Since March 2014, inter alia the US, the EU, Japan, Canada have been implementing smart sanctions such as travel bans and asset freezes against Russian and Ukrainian individuals and organizations due to the Ukrainian crisis. In other cases, smart sanctions could be applied against other countries‘ nationals, e.g. due to human rights violations of that country.
Smart sanctions are a classical system of decentralized retaliation in international relations. They are necessary for the effectuation of international law in case the centralized collective sanctioning system via the UN Security Council does not work (e.g. because one of the permanent veto powers objects). Whereas 30 years ago, general trade sanctions were in fashion, nowadays, sanctions tend to target only those who are responsible within the country in order to avoid harm to the general population.
Smart sanctions may conflict with other areas of international law – especially international investment law – rendering the decentralized system of sanctioning (even more) ineffective. International Investment Agreements (IIAs) protect foreign investors inter alia against uncompensated expropriation of their assets (broadly defined) and against unfair and unequitable treatment which is understood to include a due process guarantee such as fair procedures. Most IIAs provide the direct right to sue the host state for damages before an international arbitral tribunal (mostly the International Center for the Settlement of Investment Disputes, part of the World Bank Group), whose judgments are enforceable in over 150 countries. IIAs are mostly concluded bilaterally, and around 3250 currently exist worldwide. Russia has 59 and Ukraine has 58 IIAs in force, Germany has concluded over 150 IIAs. Some of the targeted individuals and firms will have assets in the sanctioning countries. For example, a Russian citizen holding assets in Canada whose account is frozen could sue Canada for expropriation under the Canadian-Russian IIA. If successful, Canada would need to pay damages to the sanctioned individual, rendering the sanctions useless.
The probability that at some point these IIAs might be used by sanctioned individuals and firms against smart sanctions must be seriously considered. Can the sanctioning state raise a legal defense against the claim of the sanctioned person? In other words, can it argue that it is allowed to take countermeasures and thus escape responsibility? Such countermeasures are in principle illegal under international law but considered legal when taken as a response to an international wrongful act.
First, the tribunal needs to have jurisdiction and this is only the case if there is an „investment“. Although in some circumstances a sole bank account may not count as an investment, in most cases, especially if firms are targeted, the notion of investment (which is necessary for the jurisdiction of the tribunal) is unproblematic. Furthermore, under current case law there is not much doubt that asset freezing over a longer duration is an expropriation, and that this act without due process constitutes an internationally wrongful act under the IIAs. Sanctions by the EU pose a special jurisdictional problem since the EU does not yet1 have an IIA with Russia or Ukraine (the Association Agreement of 20142 does not contain an investment chapter). The question is thus which entity is the right defendant: the Member State which has an IIA with the sanctioned state and was under an obligation to take the implementing measure or the EU which is the originator of the measure. Here, the Bosphorus principle3
* Since 2012 Prof. Dr. Anne van Aaken is Professor of Law and Economics, Legal Theory, Public International Law and European Law at the University of St. Gallen. Her main research focus is the application of (behavioural) economic methods to international law and legal theory. She is currently Vice President of the European Society of Internatio- nal Law and was Vice President of the European Association of Law and Economics. She has held guest professorships i.a. at Columbia Law School and Hebrew University, Jerusalem and has published widely in peer-reviewed journals. Furthermore, Prof. van Aaken worked as an ex- pert consultant for the World Bank, UNCTAD, OECD and GIZ.
1 The EU is only now developing its IIA policy after the Treaty of Lisbon gave it the competence to conclude treaties on investment protection.
2 O.J. L 161/3.
3 European Court of Human Rights, Bosphorus v Ireland (App no 45036/98), 30 June 2005. The Bosphorus principle applies where a Contracting State’s authorities have acted e.g. by implementing a decision of an international organization such as the EU. Applications at the Court are held inadmissible ratione personae as they are directed, in effect, against an act of an international organization which is not a party to the CoE Convention on Human Rights. In analogy, one could reason that the EU is not a party to the IIA.
may be applied by an investment tribunal, denying jurisdiction ratione personae, if the tribunal reasons that the EU would be the right defendant (but has no IIA).
Turning to the defense possibilities of the sanctioning host states, modern US and Canadian IIAs contain so-called non-precluded measure clauses (NPM)4 excusing the state if national security is at stake. One may argue that national security is at stake even if the Ukrainian crisis is far away, but this is legally shaky. Newer IIAs of the USA and Canada extend the NPM clause to the maintenance or restoration of international peace or security, clearly allowing for uncompensated targeted sanctions. Interestingly, current European IIAs do not contain NPM clauses. Furthermore, the Russian-Canadian IIA from 1991 does not have one.
Thus, the only possibility for a host state to defend itself against a claim of a sanctioned individual or firm is via customary international law, namely the law of countermeasures as countermeasures as promulgated by the International Law Commission (ILC) in the Articles on the Responsibility of States for Intentionally Wrongful Acts (ARSIWA). Two cases have to be distinguished in this context: (1) injured states taking measures to reciprocate the injury (Arts. 42, 49 ARSIWA) and (2) non-injured states taking measures (e.g., sanctions) to effectuate obligations owed to the international community as a whole (Art. 48). Whereas in the former case, the measures can (within certain limits) be illegal, as e.g. targeted sanctions under an IIA, in the latter case it is heavily disputed whether non-injured states can take illegal measures in the collective interest or only use lawful reprisals.5 The reason for this restriction is that without it any (powerful) state may have an excuse to take countermeasures outside of the UN. Following the ILC, the sanctions against Russia, for example, would probably be illegal, and sanctioning states would need to pay damages under IIAs.
Were a tribunal to follow academic opinions endorsing countermeasures by non-injured states,6 limits would nevertheless need to be respected – such as the obligation to protect fundamental human rights. If the legal obligations in IIAs were considered as an objective human rights regime, expropriation would not be accepted. If, in contrast, one views them as a mainly reciprocal inter-state regime of international economic relations,7 then the sanction would probably be approved.
A further contentious issue is the nature of the rights of the investors. If their rights are merely derived by being third party beneficiaries,8 or the rights in IIAs are viewed as belonging only to states (IIAs as inter-state relations), sanctioning would be possible. But if IIAs are viewed as giving a direct right to the investor, the investor would be a third party who therefore cannot be sanctioned.9 Investment tribunals have so far followed overwhelmingly the direct rights approach, and thus have denounced sanctioning investors in order to punish the home state.10
In short, unless states – including the EU and Germany – write explicitly in their IIAs that measures for the restoration of international peace and security are permissible, they risk being held liable for damages; targeted sanctions would then be rendered useless. This could endanger the decentralised effectuation of international law.
4 NPM Clauses allow states to take actions otherwise inconsistent with the IIA when, for example, the actions are necessary for the protection of essential security, the maintenance of public order, or to respond to a public health emergency.
5 The ILC leaves that question explicitly open, stating that the „practice on this subject is limited and rather embryonic“ (p. 137 of the ARSIWA Commentaries).
6 See Christian Tams, Enforcing Obligations Erga Omnes in International Law (Cambridge: CUP , 2010); Elena Katselli Proukaki, The Problem of Enforcement in International Law (London: Routledge, 2010); Institute of International Law, Resolution on obligations and rights erga omnes in international law, IDI Resolution I/2005 (2005), 71(2) Ann IDI 286, Art. 5.
7 Martins Paparinskis, „Investment arbitration and the law of countermeasures“, British Yearbook of International Law, vol. 79, p. 264 (2008).
8 See Anthea Roberts, „Triangular treaties: the nature and limits of investment treaty rights“, Harvard International Law Journal, vol. 56 (2015, forthcoming).
9 See Tillmann Braun, „Globalization-driven innovation“, Journal of World Investment & Trade 15 (2014), 73.
10 See Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc v. Mexico, ICSID Case No. ARB(AF)/04/05 (NAFTA), September 26, 2007 (investor has only procedural, not substantial rights), but Separate Opinion (rights of the investor are, in all cases, fundamentally individual rights); Corn Products v. Mexico (Decision on Responsibility), ICSID Case No. ARB(AF)/04/01, January 15, 2008 (individual rights of the investor, possibility of the justification of the Mexican tax as a countermeasure rejected); Cargill v. Mexico, ICSID Case No. ARB(AF)/05/2, September 18, 2009 (right to take countermeasures does not justify measures which infringe upon the rights of third parties).