I. INTRODUCTION
International investment arbitration tribunals have been somewhat inconsistent in how they take into consideration the negative impact that foreign investors can have on the environment and the communities in which they operate. Some decisions demonstrate a certain level of responsiveness concerning health and environmental considerations underlying the adoption of measures that affect foreign investments.Footnote 1 By contrast, other tribunals have chosen not to engage with these issues and have only considered the extent to which the conduct of the respondent State violates its obligations under international investment law.Footnote 2 This inconsistent approach with respect to foreign investors’ responsibilities appears to result from the preoccupation of international investment law with State responsibility rather than the conduct of private actors.Footnote 3 The failure to clearly integrate foreign investors’ responsibilities into international investment law has also been viewed as undermining the legitimacy of the regime as a whole.Footnote 4
The principle of contributory fault (or contributory negligence) could assist tribunals to address foreign investors’ responsibilities when deciding an investment claim more holistically. Under international law, there is broad acceptance that a victim's wilful or negligent conduct that has materially contributed to the injury caused by an internationally wrongful act should be taken into account when determining compensation.Footnote 5 While a limited number of investment arbitration tribunals have suggested that contributory fault can preclude the establishment of the respondent State's liability,Footnote 6 most tribunals have relied upon it to address investor misconduct and have reduced the compensation to be paid to the claimant accordingly.Footnote 7 Other tribunals have expressly referred to contributory fault but have not reduced the amount of compensation to be paid to the foreign investor either because of the absence of a breach by the respondent StateFootnote 8 or because there was no wilful or negligent conduct on the side of the claimant.Footnote 9 Contributory fault has also been raised by some arbitrators in dissenting opinions without its having been accepted by the majority of the tribunal as a ground to reduce compensation.Footnote 10
In itself, the use of contributory fault is a promising means by which to incorporate consideration of investor misconduct into international investment arbitration. While reliance on the idea by investment tribunals remained relatively rare as little as ten years ago,Footnote 11 there is now an apparently increasing trend of applying contributory fault when determining the appropriate level of compensation that should be awarded to foreign investors in light of their conduct.Footnote 12 However, the decisions of various tribunals show the lack of a clear approach to assessing the conduct of the investor and to apportioning responsibility between the parties involved. Taking seriously the assertion that the legitimacy of international investment arbitration partly depends upon the ability of tribunals to produce well-reasoned and financially sound decisions on valuation,Footnote 13 this lack of consistency is particularly troublesome. The current approach to contributory fault has even been described as ‘a purely discretionary allocation of liability’ which can seriously impede the predictability and certainty that are necessary in international investment arbitration.Footnote 14
The lack of a coherent approach to foreign investors’ responsibilities and the inconsistent reliance on contributory fault by tribunals are two phenomena that contribute to a broader lack of consistency and coherence in international investment arbitration. These two intersecting phenomena have also been explored in the context of attempts to reform international investment agreements. For example, the United Nations Conference on Trade and Development (UNCTAD) has identified a number of areas in need of reform and objectives that should guide it.Footnote 15 In addition to the importance of enhancing systemic consistency and reforming the investor–State dispute settlement mechanism, UNCTAD has explicitly referred to the need to ensure more responsible investor behaviour through international investment agreements. In this context, how can international investment agreements contribute to a more consistent application of contributory fault in a way that ensures a more coherent consideration of foreign investors’ responsibilities in international investment arbitration?
This article argues that addressing contributory fault in international investment agreements would improve the consistency of international investment arbitration on two fronts. First, without jeopardising a tribunal's inherent margin of discretion when apportioning responsibility between disputing parties, the language of international investment agreements could ensure a more coherent approach to the application of contributory fault by tribunals. Secondly, by requiring reliance upon contributory fault when there has been investor misconduct, such provisions can also contribute to a more consistent consideration of foreign investors’ responsibilities in international investment arbitration. In order to explore these two dimensions, Section II provides an assessment of the reliance so far placed upon contributory fault by investment arbitration tribunals, shedding light on its relevance to address the responsibilities of foreign investors and problems caused by the lack of consistent application. Section III focuses on provisions included in recent model international investment agreements that concretise the principle of contributory fault and which respond to the lack of consistency in its use by tribunals, and offers further suggestions for improvement.
II. THE USE OF CONTRIBUTORY FAULT IN INTERNATIONAL INVESTMENT ARBITRATION
In order to analyse the potential contribution of international investment agreements to a more coherent articulation of contributory fault, it is worth examining how investment tribunals have relied on the principle so far. Contributory fault is rooted in the law of State responsibility. It has subsequently percolated into international investment arbitration through judicial practice in a way that suggests an evolution from referring only to bad business judgements to encompassing various forms of illegality. Current reliance on contributory fault is nevertheless characterised by various problems which significantly affect the consistency with which the idea is applied by investment arbitration tribunals.
A. ‘Contribution to the Injury’ in International Law
Under international law, contributory fault first emerged not in the context of international investment arbitration but as a corollary of the full reparation principle.Footnote 16 As the Permanent Court of International Justice established in the Chorzów Factory case, ‘reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed’.Footnote 17 This principle was subsequently included by the International Law Commission in Article 31 of the Articles on Responsibility of States for Internationally Wrongful Acts (ILC Articles on State Responsibility), which states: ‘The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act’.Footnote 18 When a causal link is established between the injury and the wrongful act, the principle of full reparation thus requires the ‘re-establishment of the situation affected by the breach’.Footnote 19
Seeking full reparation for injury caused by an internationally wrongful act implicitly requires the consideration of the extent to which the injured party has contributed to the occurrence of the injury. In other words, there is a need to ensure that the compensation awarded does not exceed the loss actually suffered by the victim.Footnote 20 It is in this regard that Article 39 of the ILC Articles on Responsibility of States provides that ‘[i]n the determination of reparation, account shall be taken of the contribution to the injury by willful or negligent action or omission of the injured State or any person or entity in relation to whom reparation is sought’.Footnote 21 As emphasised in the commentary to Article 39, the idea is not to consider every form of action or omission which contributes towards the injury. Rather, ‘only those actions or omissions which can be considered as willful or negligent, i.e. which manifest a lack of due care on the part of the victim of the breach for his or her property rights’,Footnote 22 are relevant for those purposes. While the concept of negligence is not elaborated upon in Article 39, the ILC emphasises that the relevance of any negligence depends ‘upon the degree to which it has contributed to the damage as well as the other circumstances of the case’.Footnote 23
It is also worth mentioning that the ILC addressed ‘contribution to the injury’ in Part Two of its Articles on State Responsibility, entitled ‘Content of the International Responsibility of a State’.Footnote 24 Since Part Two focuses on legal consequences emerging from the responsibility of States, it concerns the determination of compensation related to a breach of international obligations rather than liability. The victim's contributory fault thus amounts to a circumstance that can attenuate (or even offset) compensation, without precluding the liability of the State for an internationally wrongful act.Footnote 25 By contrast, circumstances precluding the wrongfulness of a State's conduct are included in a separate chapter of Part One.Footnote 26 These circumstances relate to consent, self-defense, countermeasures, force majeure, distress, necessity, and compliance with peremptory norms. In other words, while some limited circumstances exist which prevent the liability of a State under international law from arising, the contributory fault of the victim cannot preclude the wrongfulness of an act of a State.
B. From Bad Business Judgement to Unlawful Acts
Investment arbitration tribunals must approach the valuation of damages with a view to determining the amount that will provide full reparation but that will not overcompensate the claimant. It is in this context that reliance on contributory fault becomes relevant for tribunals. Even though the principle of ‘contribution to the injury’ emerged in the context of inter-State relations,Footnote 27 tribunals have increasingly relied upon contributory fault in investor–State dispute settlement to reduce the loss suffered by claimants if the foreign investors were also at fault.Footnote 28 As demonstrated by the various decisions in which tribunals have found contributory fault on the part of the claimant, it can include various forms of investor misconduct. Examples range from bad business decisions to a wide variety of unlawful acts, including refusal to pay taxes and human rights violations.
The effect of a claimant's business judgement has been addressed by some tribunals even without expressly referring to the principle of contributory fault. In an oft-cited paragraph of Maffezini v Spain, the tribunal observed that bilateral investment treaties (BITs) were not ‘insurance policies against bad business judgements’.Footnote 29 In MTD v Chile, however, business decisions made by the investors were addressed in detail under the rubric of contributory fault. In this investment dispute, the respondent State alleged that the claimants had failed to exercise due diligence before making their investment in Chile, mainly due to not having adequate professional advice about urban development and having improper land valuations at the time of making the investment.Footnote 30 In the award, the tribunal maintained that BITs ‘are not an insurance against business risk’ and considered ‘that the Claimants should bear the consequences of their own actions as experienced businessmen’.Footnote 31 When valuing the damages owed to the claimants, the tribunal recalled that several decisions made by the investors had increased their risks in the transaction.Footnote 32 In light of the risks voluntarily assumed by the foreign investor, the tribunal considered ‘that the Claimants should bear part of the damages suffered and the Tribunal estimate[d] that share to be 50 [per cent] after deduction of the residual value of their investment’.Footnote 33
The findings of the tribunal were challenged by Chile, which requested annulment of the award on the grounds that the tribunal had manifestly exceeded its powers, that there had been a serious departure from a fundamental rule of procedure, and that the award had failed to state reasons regarding the tribunal's findings.Footnote 34 With respect to contributory fault, Chile maintained that ‘even if some apportionment of responsibility was appropriate … the Tribunal gave no reason for apportioning the loss on a 50:50 basis’.Footnote 35 The annulment committee confirmed the relevance of Article 39 of the ILC Articles on State Responsibility to international investment arbitration and emphasised that there was ‘no reason not to apply the same principle of contribution to claims for breach of treaty brought by individuals’.Footnote 36 It ultimately found that there were no annullable error in the reasoning of the tribunal.Footnote 37
In addition to their consideration of bad business decisions, investment tribunals have also relied upon contributory fault to address unlawful acts perpetrated by claimants. In Occidental v Ecuador, the tribunal found that the adoption of a decree terminating a participation contract and ordering the Occidental Exploration and Production Company (OEPC) to turn over its assets to PetroEcuador violated Ecuadorian law as well as the obligations of the respondent State under customary international law and the applicable BIT.Footnote 38 However, the tribunal also considered the effect of OEPC's transfer of contractual rights to a third party (Alberta Energy Corporation or AEC) without securing the appropriate ministerial authorisation from Ecuador.Footnote 39 After referring to Articles 31 and 39 of the ILC Articles on State Responsibility,Footnote 40 the tribunal noted that a contribution to injury must be ‘material and significant’ in order to trigger a finding of contributory fault.Footnote 41 It then concluded the following:
Since [OEPC] did not seek nor obtain the required authorization, the Tribunal has found that it acted negligently and committed an unlawful act. The Claimants’ fault prevented the Respondent from exercising, in a formal way, its sovereign right to vet and approve AEC as the transferee of those rights and, even more importantly on the facts of the present case, to vet any other unknown investor to which AEC could eventually transfer its rights. In the view of the Tribunal, the Claimants should pay a price for having committed an unlawful act which contributed in a material way to the prejudice which they subsequently suffered when the Caducidad Decree was issued.Footnote 42
This finding led the majority of the tribunal to conclude that the claimants had contributed to their own prejudice to the extent of 25 per cent.Footnote 43
The awards rendered in three investment claims related to Russia's treatment of OAO Yukos Oil Company (Yukos) are particularly interesting illustrations of the role of contributory fault in addressing investor misconduct.Footnote 44 The tribunal in these awards initially found that ‘unclean hands’ could not be considered a general principle of international lawFootnote 45 and that it could not act as a bar to jurisdiction or admissibility in the investment disputes at hand.Footnote 46 After having reached this conclusion, the tribunal nevertheless considered the wrongdoings of the investors through the lens of contributory fault. Referring to Articles 31 and 39 of the ILC Articles on State Responsibility, it chose to analyse whether there was a sufficient causal link between the conduct of Yukos and the loss that claimants suffered through the destruction of the company.Footnote 47 Echoing the tribunal in Occidental v Ecuador, the tribunal recalled that the contribution to the injury must be ‘material and significant’.Footnote 48 After reviewing 28 instances of alleged illegal or bad faith conduct attributable to the claimants,Footnote 49 the tribunal ultimately concluded that three of them were sustainable and that the ‘Claimants should pay a price for Yukos’ abuse of the low-tax regions by some of its trading entities, including its questionable use of the Cyprus-Russia [Double Taxation Agreement], which contributed in a material way to the prejudice which they subsequently suffered at the hands of the Russian Federation’.Footnote 50 Once again, the tribunal decided to reduce the damages owed to the investor by 25 per cent to reflect the contributory negligence of the claimants.Footnote 51
In addition to cases involving unlawful transfers of contractual rights and abuse of tax schemes, contributory fault has more recently been considered to apply to alleged human rights violations by a foreign investor. In Copper Mesa v Ecuador the tribunal, relying on Article 39 of the ILC Articles on State Responsibility,Footnote 52 took into account several acts by the claimant's local agents in Ecuador that had reduced the chances of the mining concession held by the investor being a commercial success. It highlighted the recruitment and use of ‘armed men, firing guns and spraying mace at civilians, not as an accidental or isolated incident but as part of premeditated, disguised and well-funded plans to take the law into its own hands’.Footnote 53 Taking that conduct into account, the tribunal ultimately assessed the claimant's contribution to its own injury at 30 per cent and reduced the level of compensation accordingly.Footnote 54
A final illustration of the broad range of investor misconduct that can result in findings of contributory fault can be found in Bear Creek v Peru.Footnote 55 The majority of the tribunal concluded that there had been no contributory fault on the part of the claimant concerning the emergence of social unrest that resulted in measures being adopted which ended the claimant's rights to operate its mining concessions.Footnote 56 According to the majority, the ‘Claimant could take it for granted to have complied with all legal requirements with regard to its outreach to the local communities’.Footnote 57 It also observed that the ‘Respondent, after its continuous approval and support with Claimant's conduct, cannot in hindsight claim that this conduct … caused or contributed to the social unrest in the region’.Footnote 58
However, in his dissenting opinion, Professor Philippe Sands relied upon contributory fault when considering the role of the claimant regarding the social unrest.Footnote 59 According to his assessment of the evidence presented before the tribunal, Sands concluded that the claimant's acts and omissions had contributed to the situation that prevailed in Peru and which had required the respondent State to react reasonably.Footnote 60 He argued:
[T]he project collapsed because of the investor's inability to obtain a ‘social license’. … If nothing else, the absence of transparency at the early stage of the Project can only have contributed to an undermining of the conditions necessary to build trust over the longer term. The discontent that followed, expressed by many members of the affected local communities, was foreseeable.Footnote 61
Given that the contribution of the claimant was ‘significant and material’, Sands would have reduced the measure of damages owed to the investor by 50 per cent.Footnote 62
It is worth emphasising that approaches to contributory fault do not seem to vary between different investment protection standards. For example, tribunals relied upon contributory fault after identifying breaches by respondent States of their obligations under expropriation provisions in applicable investment agreements in Occidental v Ecuador,Footnote 63Yukos v Russia Footnote 64 and Copper Mesa v Ecuador.Footnote 65 Contributory fault was also used in the context of violations of fair and equitable treatment in MTD v Chile,Footnote 66Occidental v Ecuador Footnote 67 and Copper Mesa v Ecuador.Footnote 68 Even violations of domestic law and customary international law were at play in Occidental v Ecuador.Footnote 69 To the extent that contributory fault is used to reduce compensation owed to claimants, this uniformity of approach is relatively unsurprising. When tribunals have relied upon contributory fault to take into account the conduct of an investor, the principle has not been factored into the analysis of a specific substantive standard. Rather, it has taken place after a finding that the respondent State had breached its obligations, and in the context of assessing the damage attributable to the State's actions, regardless of the nature of the claim.
In sum, most investment arbitration tribunals have expressly relied upon the ILC Articles on State Responsibility when using the principle of contributory fault with a view to addressing a wide range of investor misconduct and to apportioning responsibility between disputing parties. Early instances focused on the lack of good judgement by foreign investors in making their business decisions. Tribunals have also drawn upon the idea to make the investor pay for various forms of unlawful practices, including breaches of contractual obligations and abuses of tax schemes. Contributory fault has also proved relevant to addressing physical violence by the local agents of a foreign investor and has been put forward by a dissenting arbitrator in the context of a foreign investor contributing to social unrest. Most importantly, the evolving practice of investment tribunals suggests that it provides a possible means of imposing (explicitly or implicitly) certain forms of responsibilities on foreign investors and ensuring that claimants do not benefit from their own contribution to the injury caused by a State's internationally wrongful act.
C. The Lack of a Coherent Approach
The use of contributory fault in order to more consistently consider the responsibilities of foreign investor in international investment arbitrations is counterbalanced by a general absence of a clear approach with respect to its application. At least five issues contribute to this lack of coherence: 1) the consideration of contributory fault as a matter of liability rather than compensation; 2) divergent approaches regarding the phase of arbitration proceedings in which the principle should be considered; 3) uncertain reliance on contributory fault in the presence of investor misconduct; 4) the absence of clear standards of conduct to assess the actions or omissions of the investor; and 5) the frequent lack of explanation for the specific apportionment of responsibility reached by tribunals.
1. Liability or compensation
There is at least one award in which the tribunal suggested that the principle of contributory fault could be used as a way of precluding the respondent State's liability rather than as a means of reducing compensation owed to the claimant. After focusing on the possibility of several events that can lead to the occurrence of an injury under Article 31 of the ILC Articles on State Responsibility, the tribunal in Micula v Romania concluded that:
Thus, an intervening event will only release the State from liability when that intervening event is (i) the cause of a specific, severable part of the damage, or (ii) makes the original wrongful conduct of the State become too remote. Unless they fall under either of these categories, cases of contributory fault by the injured party appear to warrant solely a reduction in the amount of compensation.Footnote 70
While this interpretation usefully highlights the complexity underlying the issue of causation, it remains problematic. By suggesting that some intervening events can ‘release a State from liability’, the interpretation provided by the tribunal is inconsistent with the fact that the relationship between causation and contributory fault is only relevant for the determination of reparation in the international law of State responsibility. As mentioned above, Articles 31 and 39 are included in Part Two of the ILC Articles on State Responsibility, which focuses on the content of international responsibility of a State. More specifically, as emphasised by the tribunal itself,Footnote 71 Article 39 provides that wilful or negligent action or omission on the part of the victim is only relevant ‘in the determination of reparation’.Footnote 72
Treating contributory fault as a means to reduce compensation rather than to excuse liability is also consistent with the understanding of contributory negligence in tort law at the domestic level. In the conclusion of a comparative study pertaining to the unification of tort law, Ulrich Magnus and Miquel Martin-Casals found that contributory negligence is an essential element of tort law.Footnote 73 Most importantly, in the 15 States considered by the study, contributory negligence could only result in a reduction of the damages that would otherwise have been awarded to the claimant.Footnote 74 While Roman law accepted that a tortfeaser could potentially be released from liability as a result of contributory fault, a more flexible approach based on the apportionment of damages between disputing parties has now found favour.Footnote 75
This widely shared understanding of contributory negligence at the domestic level constitutes an additional reason why a consistent approach should be sought in investment arbitration regarding contributory fault and the question of compensation. To put it another way, the acts of the investor might be relevant when determining whether the State is liable. For example, if an investor engages in a pattern of polluting activities, the State's revocation of that investor's operating license might not be a violation of the fair and equitable treatment standard. If there is a violation of the fair and equitable treatment standard, however, the fact that the investor also engaged in harmful activity does not negate the State's culpability on the basis of contributory fault.
To be clear, it is not suggested that investor misconduct should never be taken into consideration when determining State liability. It is evident that, factually speaking, an investor's misconduct might justify the conduct of a State and thus preclude its liability. This is slightly different from the situation where the investor's violation of a legal obligation is viewed as an intervening event that can release the State from liability. It is submitted that a proper consideration of investor misconduct in that context should rely upon other doctrines and principles. For example, notwithstanding the refusal of the tribunal in Yukos v Russia to consider the ‘clean hands’ doctrine as a general principle of international law, it has been suggested that it can be used by investment arbitration tribunals to bar the admissibility of claims in the presence of violations committed by investors.Footnote 76 More information regarding the distinction between the ‘clean hands’ doctrine and the principle of contributory fault is provided in the following sub-section. At this point, what needs emphasising is that the ILC Articles on State Responsibility and the consideration of contributory negligence in domestic tort law both call for the application of contributory fault to be limited to the amount of compensation owed to the claimant rather than to the liability of the respondent State.
2. Merits or quantum (or causation)
A related issue concerns the stage of the proceedings at which the question of contributory fault should be addressed. One might expect contributory fault, as a question of compensation, to be addressed during proceedings on quantum. Nonetheless, even though the majority of tribunals have correctly considered contributory fault as a matter of compensation, some tribunals have considered the acts or omissions of the investor when assessing the merits of the claim.Footnote 77 When these tribunals have found contributory fault by the claimant, this finding was then reflected in the quantum calculation.Footnote 78 By contrast, and in a way that is more intuitively related to the consideration of contributory fault as a means of reducing the level of compensation, several tribunals have raised the matter at the quantum stage only.Footnote 79 Interestingly, other tribunals have considered the alleged contribution of the claimants to their own injury in a section on causation, after having addressed the merits of the claim and before turning to quantum.Footnote 80
It is widely accepted that contributory fault is not strictly limited to the quantum of damages, given its strong factual connection with the responsibility of the disputant State party.Footnote 81 Depending upon the nature of the wilful negligent action or omission and its relationship with the wrongful conduct in question, investor conduct is therefore more or less likely to be raised during the consideration of the merits. For example, when the conduct of the claimant precedes the measure adopted by the respondent State, a complete analysis of the merits of the claim is likely to require detailed consideration of the conduct at hand.Footnote 82 By contrast, if the conduct of the investor contributing to the injury suffered is not related to the wrongful conduct of the State, it can easily be addressed at the quantum of damages stage. To the extent that consideration of contributory fault is ultimately reflected in the damages that are owed to the investor, whether it is raised during the assessment of the merits or the quantum of damages does not seem to have any clear practical impact.
Despite the need for flexibility regarding when contributory fault will be considered during arbitration proceedings, additional clarification regarding the link between causation and contributory fault is nevertheless required.Footnote 83 The consideration of causation is not attached to a specific phase of arbitration proceedings in international investment law. Some tribunals have suggested that an analysis of causation constitutes a separate step in the consideration of the quantum of damages, which includes ‘causation between the unlawful act and the alleged injury’ and ‘the precise amount of the loss suffered’.Footnote 84 By contrast, some authors consider that causation ‘should be treated as a separate concept in the analysis of investment claims’, outside the traditional distinction between the assessment of the merits and quantum of damages.Footnote 85
The confusion concerning when causation and contributory fault should be considered has led some tribunals to propose an integrative approach. For example, the tribunal in Copper Mesa v Ecuador adopted an approach that combined causation, contributory fault and unclean hands:
For present purposes, the Tribunal considers that the general approach taken in all these decisions, whether treated as causation, contributory fault (based on willful or negligent act or omission) or unclean hands, is materially the same, deriving from a consistent line of international legal materials. The Tribunal decides to apply that general approach in this case. As further explained below, it decides that the Claimant's injury was caused both by the Respondent's unlawful expropriation and also by the Claimant's own contributory negligent acts and omissions and unclean hands. Given that the Tribunal draws no distinction between these different concepts for this case, it prefers to refer only to Article 39 of the ILC Articles.Footnote 86
This combined approach is problematic on two fronts. First, the equation of contributory fault and causation fails to address a key distinction between the two concepts. Of course, contributory fault is a corollary to the obligation of States to make full reparation for the injury caused by the wrongful act. However, the principle of causation encompasses broader issues of uncertainty in the unfolding of a chain of events and the impact of the actions of third parties, without necessarily being strictly related to the conduct of the claimant.Footnote 87 In fact, it is broadly intended to ensure that conduct that is attributable to an actor other than the State does not lead to the responsibility of that State.Footnote 88 By contrast, contributory fault specifically relates to the wilful or negligent action or omission of the victim of the injury. It thus requires a careful analysis of the investor's misconduct when determining compensation.
Secondly, the combination of contributory fault with the doctrine of unclean hands appears problematic to the extent that the latter can also relate to the admissibility of the claim rather than being limited to the determination of compensation. It is interesting to note that the tribunal in Copper Mesa v Ecuador first addressed the issue of unclean hands in the section of the award dealing with jurisdiction and admissibility.Footnote 89 It expressly found that the respondent State's case regarding unclean hands was a matter of admissibility based on allegations of post-acquisition misconduct, rather than a jurisdictional objection.Footnote 90 However, after emphasising that the alleged misconduct of the investor ‘took place in Ecuador, openly and in view of the Respondent’,Footnote 91 the tribunal decided that the respondent State was precluded from raising the unclean hands doctrine to render the claim inadmissible.Footnote 92 It would have been more coherent to follow the approach taken by the tribunal in Yukos v Russia,Footnote 93 and to address the unclean hands doctrine as a matter of admissibility whilst relying upon contributory fault only when turning to the issue of causation.
3. An uncertain reliance on contributory fault
It is plain that findings of contributory fault remain relatively infrequent when one considers the increasing number of disputes submitted to international arbitration.Footnote 94 Of course, this rareness depends upon the facts of each case and the evidence submitted to tribunals. There are nevertheless some instances in which evidence of investor misconduct has been acknowledged by the tribunal without its leading to an explicit apportionment of responsibility between the disputing parties. While it is not the intention of this article to determine how the doctrine of contributory fault is to be applied, the fact that some tribunals have not relied upon contributory fault in order to reduce damages when there has been evident investor misconduct is problematic and contributes to the inconsistency of international investment arbitration.
One glaring example of this situation is RosInvestCo v Russia.Footnote 95 The claimant in RosInvestCo v Russia also held shares in Yukos, the claimant in the Yukos cases referred to earlier. When addressing Yukos’ contribution to the loss of its own assets, the RosInvest tribunal concluded that the company ‘did in some respects contribute to its own demise’Footnote 96 and that such contributions ‘may be relevant in the consideration later in this Award of the quantum of any damage due to Claimant’.Footnote 97 However, the tribunal did not in fact address these contributions when deciding the level of damages. It took into consideration the fact that the claimant had ‘made a speculative investment in Yukos shares’Footnote 98 when determining its approach to valuation and found that ‘any award of damages that rewards the speculation by claimant with an amount based on an ex-post analysis would be unjust’.Footnote 99 The speculative nature of the investment made by the claimant was also taken into consideration in the determination of the proper approach with respect to interest.Footnote 100 However, even after acknowledging that Yukos had contributed to its own losses, the tribunal did not apportion responsibility between the disputing parties based on contributory fault.
Another example can be found in Caratube v Kazakhstan. Despite having found that the investor's contractual performances were ‘sub-standard’,Footnote 101 the tribunal emphasised that it could exercise its own discretion to decide whether it would rely upon contributory fault.
The Tribunal finds that, while it may take into account a contributory fault by [Caratube International Oil Company LLP, CIOC] in the determination of the amount of reparation to be awarded, it is entitled to wide discretionary powers in making this determination. The Tribunal further finds that it must adopt a restrictive approach in that a mere contribution to causation is not enough, in the absence of willful or negligent, reproachable behavior by CIOC, thereby materially contributing to its damage.Footnote 102
While considering the wilfulness or negligence of the investor's conduct is consistent with other decisions, suggesting that the consideration of contributory fault is itself subject to the tribunal's discretion differs from the conclusions reached by other tribunals. The tribunal ultimately concluded that the compensation awarded to the claimant should not be reduced on the basis of contributory fault.Footnote 103
The uncertain and unpredictable nature of the reliance on contributory fault by tribunals in the presence of investor misconduct is particularly problematic when one considers the language used in the ILC Articles on State Responsibility. To the extent that the ILC Articles codify customary international law and are applicable in an investor–State dispute settlement setting, the actual consideration of the investor's contribution to its own loss appears more mandatory than discretionary. Article 39 provides that ‘[i]n the determination of reparation, account shall be taken of the contribution to the injury’.Footnote 104 There would be more consistency in the application of contributory fault in international investment arbitration if investment tribunals were obliged to rely on the principle in all cases concerning wilful or negligent action or omission by the claimant.
4. The absence of clear standards of conduct
The fourth issue contributing to the lack of coherence in the application of contributory fault relates to the absence of clear standards of conduct that should be considered when assessing the wilful or negligent action or omission of the foreign investor. Investors unquestionably have obligations under domestic law, and tribunals have considered the investor's breach of those obligations as a basis for a contributory fault determination. Yet, given that the overwhelming majority of international investment agreements do not include direct obligations for foreign investors,Footnote 105 investment arbitration tribunals that seek to address investor misconduct as a violation of international law lack appropriate foundations to ground their analysis. The absence of clear standards of conduct for foreign investors is a prominent issue that reaches beyond the application of contributory fault in investment law. Attempts to impose obligations on business enterprises under international law have resulted in instruments that are potentially useful sources to ascertain the content of those obligations.
Since the 1970s, in parallel to the development of international investment law, intergovernmental organisations have played an important role in establishing standards of appropriate conduct for business enterprises operating abroad. The Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises (OECD Guidelines),Footnote 106 the International Labour Organization Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy,Footnote 107 the United Nations Global Compact,Footnote 108 the United Nations Guiding Principles on Business and Human Rights (UN Guiding Principles),Footnote 109 and the International Finance Corporation Performance Standards on Environmental and Social SustainabilityFootnote 110 all constitute examples that have emerged from intergovernmental organisations. More recently, the Human Rights Council of the United Nations established an open-ended intergovernmental working group to ‘elaborate an international legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises’.Footnote 111 At this point, none of these initiatives amounts to a formal treaty, thus limiting their ability to impose direct legal obligations on business enterprises under international law.
The general dearth of formal international obligations for foreign investors increases the complexity of relying upon contributory fault in investment arbitration. Instances of contractual breaches or abuses of tax schemes constitute unlawful conduct and can be easily addressed. However, allegations of human rights violations and contribution to social unrest appear to be harder to assess. For example, in Copper Mesa v Ecuador, the tribunal addressed the conduct of local agents hired by the foreign investor without comparing the conduct to a clear set of standards imposing human rights obligations on business enterprises, let alone determining whether Copper Mesa itself was subject to those obligations.Footnote 112 While the tribunal criticised the conduct of the claimant ‘as a sustained act of folly’,Footnote 113 it did not provide any yardstick against which the conduct of the local agents could be assessed.
This issue is particularly clear in the disagreement between the majority and the dissenting opinion in Bear Creek v Peru. In order to assess the contribution of the claimant to the social unrest that led to the measures adopted by the State, the arbitrators addressed the consultation requirements that are provided in the International Labour Organization Convention concerning Indigenous and Tribal Peoples in Independent Countries (ILO Convention 169).Footnote 114 Responding to the arguments elaborated by Sands in his dissenting opinion, the majority of the tribunal argued that ILO Convention 169 imposes direct obligations on States and that ‘private companies cannot “fail to comply” with ILO Convention 169’.Footnote 115 By contrast, the dissenting opinion addressed the relevance of the same international agreement in the following terms:
Yet the fact that the Convention may not impose obligations directly on a private foreign investor as such does not, however, mean that it is without significance or legal effects for them. … This Tribunal is entitled to take the Convention into account in determining whether the Claimant carried out its obligation to give effect to the aspirations of the Aymara peoples in an appropriate manner, having regard to all relevant legal requirements, including the implementing Peruvian legislation.Footnote 116
This disagreement between the members of the tribunal in Bear Creek v Peru clearly demonstrates the complexity of finding an appropriate standard of conduct to assess the wilful or negligent action or omission of the claimant.
The extent to which non-State actors have obligations under international investment agreements is beyond the scope of this article and cannot be fully addressed here.Footnote 117 Some authors even question whether international investment agreements constitute a proper forum to impose obligations on foreign investors, in contrast to domestic legislation.Footnote 118 The informal nature of instruments that establish standards of conduct also raises important questions in terms of their ability to create an actual sense of obligation for business enterprises.Footnote 119 As demonstrated in Section III, states can nevertheless bring more clarity to the issue by including in international investment agreements obligations for foreign investors or by referring to the standards of appropriate conduct that have been elaborated by intergovernmental organisations. For present purposes, it suffices to say that the general lack of formal obligations imposed on foreign investors in international investment agreements and the informal character of initiatives of intergovernmental organisations inevitably induce a level of inconsistency in the application of contributory fault in international investment arbitration.
5. The lack of explanations
Finally, a fifth issue contributing to the lack of coherence in the application of contributory fault relates to the absence of clear explanations by investment tribunals to justify their apportionment of responsibility between the disputing parties.Footnote 120 In other words, tribunals that have relied on contributory fault to reduce the levels of compensation awarded to the investor have generally not provided a proper explanation for reduction they chose. Of course, the margin of discretion which tribunals have to apportion responsibility between the disputing parties is an important feature of the valuation processFootnote 121 and has been explicitly reaffirmed in decisions of tribunals. In the words of the annulment committee in MTD v Chile:
The Committee agrees with the Respondent that some further reasons for a 50:50 split of damages could have been offered at this stage. But the Tribunal had already analysed the faults on both sides in some detail, holding both to be material and significant in the circumstances. As is often the case with situations of comparative fault, the role of the two parties contributing to the loss was very different and only with difficulty commensurable, and the Tribunal had a corresponding margin of estimation.Footnote 122
Since the decision of the MTD annulment committee, the margin of estimation enjoyed by tribunals has been echoed in other decisions, with several tribunals emphasising their ‘wide margin of discretion in apportioning fault’Footnote 123 and their ability to ‘exercise [their] wide discretion’.Footnote 124
The approach so far taken by most tribunals has been to engage in an extensive description of the facts that have contributed to the injury of the investor, without providing any specific reasons to justify the apportionment decided upon.Footnote 125 For example, the tribunal in Occidental v Ecuador summarised its reasoning in the following terms:
Having considered and weighed all the arguments which the parties have presented to the Tribunal in respect of this issue, in particular the evidence and the authorities traversed in the present chapter, the Tribunal, in the exercise of its wide discretion, finds that, as a result of their material and significant wrongful act, the Claimants have contributed to the extent of 25 [per cent] to the prejudice which they suffered when the Respondent issued the Caducidad Decree. The resulting apportionment of responsibility as between the Claimants and the Respondent, to wit 25 [per cent] and 75 [per cent], is fair and reasonable in the circumstances of the present case.Footnote 126
This was considered to be an underestimation of the claimants’ contribution to their own loss by one of the members of the tribunal.Footnote 127 In her dissenting opinion, Professor Brigitte Stern highlighted the fact that the tribunal in MTD v Chile had endorsed a proportion of 50 [per cent] when considering the imprudent action of the investor only from a business perspective and maintained that ‘[a] split 50/50 would have been even more justified, as the Claimants have acted both very imprudently and illegally’.Footnote 128 Stern recalled that ‘[t]his critique of the majority's position, however, is not based on an error of law or an excess of power, but on a different appreciation of the factual situation, which is at the discretion of the Tribunal’.Footnote 129 At the end of the day, her dissenting opinion provides an interesting explanation (although arguably relatively thin) of the apportionment that she proposed.
A similar description of relevant facts in lieu of explanations regarding the apportionment of responsibility between the disputing parties can be found in other decisions. Echoing the wording used by the majority of the tribunal in Occidental Petroleum v Ecuador,Footnote 130 the tribunal in Yukos v Russia concluded that:
Having considered and weighed all the arguments which the Parties have presented to it in respect of this issue the Tribunal … finds that, as a result of the material and significant misconduct by Claimants and by Yukos (which they controlled), Claimants have contributed to the extent of 25 percent to the prejudice which they suffered as a result of Respondent's destruction of Yukos. The resulting apportionment of responsibility as between Claimants and Respondent, namely 25 percent and 75 percent, is fair and reasonable in the circumstances of the present case.Footnote 131
Similarly, in Copper Mesa v Ecuador, the tribunal emphasised the difficulty of estimating the claimant's contribution to its own loss in terms of a percentage and the factual character of such a finding.Footnote 132 The tribunal then continued:
Taking all these factors into account, including the provocations by certain anti-miners, the Tribunal assesses the Claimant's contribution to its own injury as at November 2008, for the purpose of applying Article 39 of the ILC Articles, at 30 per cent. On the facts of this case, it could not be less.Footnote 133
In this case, the proportion of 30 per cent is particularly intriguing considering the seriousness of the investor misconduct and the importance of the claimant's contribution to its own injury, as described by the tribunal itself.Footnote 134 The lack of a clear justification for the percentage chosen is therefore even more concerning.
In contrast to the majority of these decisions, the dissenting opinion in Bear Creek v Peru appears to include some form, albeit brief, of justification for the equal apportionment of responsibility between the disputing parties. Sands suggested reducing the measure of damages owed to the foreign investor by one half, maintaining that ‘the Claimant's contribution was significant and material, and that its responsibilities are no less than those of the government’.Footnote 135 For the same reasons, Sands also suggested that the costs of the proceedings ‘should be split equally between the Parties’.Footnote 136
With the exception of the dissenting opinions in Occidental v Ecuador and Bear Creek v Peru, the examples identified above show that there is often little explanation for the apportionment of responsibility between the parties, beyond the assertion that it is ‘fair and reasonable’Footnote 137 or that ‘it could not be less’.Footnote 138 However, their having a margin of discretion does not prevent them from offering a justification of the manner in which it is exercised. Whilst it must be acknowledged that the calculation often ‘defies any mathematical precision’,Footnote 139 tribunals can at least provide some form of explanation for their decision. The current approach is in sharp contrast with the more robust assessment of economic and mathematical information which tribunals engage in when valuing the damage to the investment that has been caused by the respondent State. The lack of justifications given by tribunals for their approach has been considered to endanger predictability and certainty in international investment arbitration.Footnote 140
To be clear, a tribunal's exercise of its margin of discretion when apportioning responsibility between disputing parties does not amount to an inconsistent application of the contributory fault doctrine. The impact of a measure adopted by a State on the value of an investment is certainly easier to quantify than a bad business decision or human rights violation. It is plain that a margin of discretion is unavoidable.Footnote 141 Moreover, and importantly, it is hard to envisage how the provisions in an international investment agreement could provide tribunals with sufficient guidelines regarding the valuation of all forms of investor misconduct,Footnote 142 ranging from unpaid taxes to bad business judgment or environmental harm. Developments relating to the valuation of damage caused by respondent States seem to have resulted more from the evolving practice of tribunals and their reliance on experts than the wording of international investment agreements. Without seeking to constrain how a valuation is arrived at, it should nevertheless be possible to require a tribunal at least to explain why a specific proportion was decided upon in a particular case.
Overall, even accepting that contributory fault covers a broad range of wilful and negligent acts and omissions, its application lacks consistency. While the wide discretion of tribunals in apportioning responsibility between the disputing parties can hardly be avoided, there are some problems in the current approach. There have been inconsistencies in the consideration of contributory fault as a matter of compensation, variations regarding the phase of arbitration proceedings in which it has been considered, a variable response to contributory fault when there has been investor misconduct, a lack of clear standards by which to assess the conduct of the investor, and a lack of reasoning to support the apportionment of fault reached by the tribunal. Against this background, the following section considers the role that can be played by international investment agreements to promote a more consistent use of contributory fault in international investment arbitration.
III. ADDRESSING CONTRIBUTORY FAULT IN INTERNATIONAL INVESTMENT AGREEMENTS
In light of the inconsistent application of the doctrine of contributory fault in international investment arbitration, including clear provisions in international investment agreements might encourage, or even require, tribunals to adopt in a more coherent approach. The broad discretion of tribunals to determine the apportionment of responsibility is inevitable and cannot realistically or desirably be addressed through treaty-making practice. However, the five problems identified in the previous section could be addressed by carefully crafting provisions in international investment agreements.Footnote 143
It is worth emphasising at the outset that investment arbitration tribunals can and do rely on contributory fault even if it is not mentioned in the relevant international investment agreement. The inclusion of ‘contribution to the injury’ in Article 39 of the ILC Articles on State Responsibility has often been cited by tribunals as a basis for their decisions. Investment tribunals can thus rely on customary international law in the absence of specific directions concerning the assessment of damages in the treaty and reduce the amount of damages owed to the claimant because of contributory fault.Footnote 144 However, beyond the general requirement to take into consideration wilful or negligent actions or omissions of the claimant when determining compensation, the absence of specific direction in either the ILC Articles or in international investment agreements leaves considerable discretion to tribunals in the actual application of contributory fault. An express reference to contributory fault in international investment agreements could contribute to more consistent reliance upon it.
Several international investment agreements include provisions concerning the compensation that can be awarded by tribunals to foreign investors.Footnote 145 While some provide quite specific instructions concerning the quantification of damages owed to a successful claimant, they do not explicitly refer to contributory fault. For example, Article 8.39(3) of the Comprehensive and Economic Trade Agreement between Canada and the European Union provides the following:
Monetary damages shall not be greater than the loss suffered by the investor or, as applicable, the locally established enterprise, reduced by any prior damages or compensation already provided. For the calculation of monetary damages, the Tribunal shall also reduce the damages to take into account any restitution of property or repeal modification of the measure.Footnote 146
Some international instruments include language that implicitly refers to the investor's contribution to its own injury. For example, the Economic Community of West African States (ECOWAS) elaborated a Supplementary Act adopting community rules on investment in 2008. This includes an entire chapter on ‘Obligations and Duties of Investors and Investments’ and Article 18 provides:
(2) Where an investor is alleged by a host Member State or an intervener in a dispute settlement proceeding under this Supplementary Act to have failed to comply with its obligations relating to pre-establishment impact assessment, the tribunal hearing such a dispute shall consider whether this breach, if proven, is materially relevant to the issue before it, and if so, what mitigating or off-setting effects this may have on the merits of a claim or on any damages awarded in the event of such award; …
(4) Where a persistent failure to comply with Article 14 [Post-Establishment Obligations] or 15 [Corporate Governance and Practices] is raised by a host Member State defendant or an intervener in a dispute settlement proceeding under this Supplementary Act, the tribunal hearing such a dispute shall consider whether this breach, if proven, is materially relevant to the issue before it, and if so, what mitigating or off-setting effects this may have on the merits of a claim or on any damages awarded in the event of such award.Footnote 147
A similar provision can be found in the model BIT adopted by the Southern African Development Community (SADC)Footnote 148 and the Draft Pan-African Investment Code.Footnote 149
The reference in Article 18 to mitigating and off-setting effects of investor misconduct on the merits of a claim could be viewed as reaching beyond the consideration of contributory fault as a matter of compensation. However, by emphasising that tribunals ‘shall’ consider whether investor misconduct is materially relevant, these provisions impose a clear requirement to consider these mitigating or off-setting effects on the damages that are to be awarded to the claimant. Moreover, when reading these provisions in the context of the broader section of the instrument in which they are included, they appear to be part of an attempt to clarify the nature of obligations imposed on foreign investors. For example, the Supplementary Act adopted by the ECOWAS imposes an obligation on investors to conduct an environmental and social impact assessment of their proposed investment.Footnote 150 Other provisions relate to anti-corruption,Footnote 151 post-establishment obligations (eg health, security, human rights and labour standards),Footnote 152 as well as obligations regarding corporate governance and practices.Footnote 153 Even if these obligations could be made even clearer, the Supplementary Act combines a consideration of the claimants’ contribution to their own injury with the need to address standards of conduct for private actors. These provisions help to concretise the types of obligations for which foreign investors are responsible and, consequently, the types of actions that can form the bases of contributory fault.
Other examples focus more on the compensation to be paid to a foreign investor when there has been wrongful conduct on the part of the respondent State. After providing that a tribunal can only award monetary damages for a breach by a State of its obligations under the agreement, Article 26(3) of the model BIT put forward by India in 2015 provides the following:
Monetary damages shall not be greater than the loss suffered by the investor or, as applicable, the locally established enterprise, reduced by any prior damages or compensation already provided by a Party. For the calculation of monetary damages, the Tribunal shall also reduce the damages to take into account any restitution of property or repeal or modification of the measure, or other mitigating factors.Footnote 154
In a footnote to Article 26(3), the model agreement also mentions that ‘[m]itigating factors can include … any unremedied harm or damage that the investor has caused to the environment or local community or other relevant considerations regarding the need to balance public interest and the interests of the investor’.Footnote 155
The provision found in the India model BIT has some limitations. The reference to ‘damage that the investor has caused to the environment or local community’ remains somewhat vague and does not provide a clear standard by which to assess the conduct of the investor. The provision nevertheless imposes a requirement on the tribunal to reduce damages owed to the investor when there has been investor misconduct. By focusing solely on damages, this type of provision is clearly distinct from consideration of investor misconduct that can preclude the liability of the State and closer to the principle found in Article 39 of the ILC Articles on State Responsibility.
A particularly useful provision to guide tribunals in the application of the principle of contributory fault can be found in the model BIT concluded by the Netherlands in 2019. Article 23 provides that:
[w]ithout prejudice to national administrative or criminal law procedures, a Tribunal, in deciding on the amount of compensation, is expected to take into account non-compliance by the investor with its commitments under the UN Guiding Principles on Businesses and Human Rights, and the OECD Guidelines for Multinational Enterprises.Footnote 156
In addition to being expressly limited to compensation, the provision refers to informal instruments elaborated by intergovernmental organisations with a view to assessing the conduct of the investor. These instruments are not intended to impose formal legal obligations on business enterprises,Footnote 157 and they are not understood here as a means of establishing the liability of foreign investors for wrongful acts under international law. Rather, taken in the context of contributory fault, they can serve as useful yardsticks for assessing an investor's wilful or negligent acts or omissions when determining the compensation to be awarded. Despite their nonbinding character, the explicit reference to them in the treaty indicates that there is an expectation of compliance. Moreover, these initiatives provide a sufficient level of clarity regarding the conduct expected of foreign investors to enable adjudicators to decide whether those obligations have in fact been met. Even though Article 26 only provides that the tribunal ‘is expected to take into account’ the failure of a claimant to comply with these initiatives,Footnote 158 this language at the very least requires the tribunal to consider investor misconduct when deciding the level of damages.
The only issue concerning the lack of consistency that is not expressly addressed in the provisions discussed above concerns explaining the apportionment of responsibility. Indeed, they grant tribunals considerable flexibility when making their determinations. For example, the ECOWAS Supplementary Act, the SADC model BIT and the Draft Pan-African Investment Code allow the tribunal to determine whether the breach by the investor is materially relevant, in addition to whether it should have a mitigating or off-setting effect. However, in light of the numerous calls for a more transparent approach to justifying the apportionment of responsibility, the inclusion of provisions that specifically call upon tribunals to explain the reasoning underlying their decisions could improve consistency and coherence in the application of contributory fault.
In the broader context of the current efforts to reform the international investment regime, the provisions found in some international instruments provide particularly promising avenues to address foreign investors’ responsibilities and to encourage a more coherent approach to contributory fault. While preserving the discretion of tribunals concerning the apportionment of responsibility between disputing parties, the examples mentioned above demonstrate that States can adopt international investment agreements which impose obligations on tribunals to address investor misconduct and provide some standards by which to assess the acts and the omissions of foreign investors. Such provisions would be improved still further if they expressly required tribunals to provide a justification for their decisions regarding apportionment and the consequential reduction in the amount of compensation awarded.
IV. CONCLUSION
A recent report by the International Bar Association's Arbitration Subcommittee on Investment Treaty Arbitration links the concepts of consistency and legitimacy in the following terms:
A legal system is consistent when it produces coherent solutions. Consistency engenders predictability, thereby contributing to the system's credibility and legitimacy. Conversely, a dispute system where comparable cases produce contradictory results is unpredictable, which increases disputes and their associated costs.Footnote 159
Whilst eliminating all forms of inconsistency is hardly possible in any legal regime, the International Bar Association report quoted above highlights the extent to which consistency in the interpretation and the application of investment rules remains a desirable goal.Footnote 160
Given the impact that it can have on the legitimacy of the international investment regime, the absence of a coherent approach by tribunals to addressing the responsibilities of foreign investors and to the application of contributory fault is highly problematic. Including explicit provisions regarding contributory fault can foster a more coherent use of the principle by tribunals, which can itself ensure more consistency in the consideration of foreign investors’ responsibilities. States should thus contribute to a more coherent approach by reforming their model international investment agreements. Moreover, even in the absence of treaty modification, tribunals can and should be more consistent and transparent in their use of the concept. The existence of a predictable approach to contributory fault as a means of effectively addressing investor misconduct in international investment arbitration is not only important in its own right: fostering a more coherent approach provides an opportunity to improve the international investment regime as a whole, by enhancing predictability in decision-making and by ensuring greater symmetry in the investor–State relationship.
