1 Introduction
It is perhaps trite to say that the principle of ‘full reparation’, enunciated by the Permanent Court of International Justice (PCIJ) in the Chorzów Factory case, has been widely recognised as the customary rule governing the reparation of internationally wrongful acts.Footnote 1 According to that judgment, where restitution is unavailable or insufficient, customary law requires the payment of compensation in the form of ‘a sum corresponding to the value which a restitution in kind would bear [and] the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it’.Footnote 2 Whilst the rights of private entities are ‘on a different plane’ to those belonging to States, the damage suffered by an individual affords ‘a convenient scale for the calculation of the reparation due to the State’,Footnote 3 so the extent of the individual injury affords the metric for the calculation of damages at the inter-State level.
The International Law Commission (ILC) took Chorzów Factory as the basis for the elaboration of the rules governing the consequences of wrongful acts in the 2001 Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA).Footnote 4 In the Commentary to Article 31, the ILC explained that ‘[t]he responsible State’s obligation to make full reparation relates to the “injury caused by the internationally wrongful act”’.Footnote 5 If restitution is unavailable or insufficient, ‘[t]he role of compensation is to fill in any gaps so as to ensure full reparation for damage suffered.’Footnote 6 Article 36 ARSIWA then states that ‘[t]he State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution’, damage being understood as ‘any financially assessable damage including loss of profits’.Footnote 7 Given that most Bilateral Investment Treaties (BITs) are silent as to the remedies applicable in case of their violation, investment tribunals have referred to Article 36 ARSIWA as reflecting the applicable standard of compensation,Footnote 8 and have recognised Chorzów Factory as an ‘authoritative description’ of customary law on the subject.Footnote 9
In line with the Chorzów Factory standard, the determination of compensation seems to operate within three governing parameters.Footnote 10 First, the identification of the extent of the damage (material or moral) as a question of fact.Footnote 11 Second, the establishment of a sufficiently direct and certain causal nexus between the damage and the internationally wrongful act.Footnote 12 Third, the quantification, in monetary terms, of any ‘financially assessable’ damage through the application of an appropriate valuation methodology.Footnote 13 The final amount of compensation will vary depending on permutations of these factors. Conversely, factual or legal considerations beyond these parameters are generally deemed irrelevant to quantum.Footnote 14
Within this conceptual framework, strongly influenced by private-law analogies from municipal tort law,Footnote 15 compensation has acquired a strong, ‘damage-centric’ focus, in the sense that it depends primarily – if not exclusively – on the demonstration of a financially assessable damage and a ‘sufficiently direct and certain causal nexus’ between the damage and the wrongful act.Footnote 16 Thus, at the final stages of its codification efforts the ILC decided to omit from the text of ARSIWA any provision allowing for extraneous factors to be taken into account in the determination of compensation beyond damage and causality, such as aggravating or mitigating circumstances, the gravity of the act, or limitations relating to proportionality.Footnote 17
A perusal of international jurisprudence, however, paints quite a different picture. In fact, early arbitral commissions,Footnote 18 the International Court of Justice (ICJ),Footnote 19 the Iran-US Claims Tribunal,Footnote 20 ad hoc inter-State tribunals,Footnote 21 as well as regional human rights courts,Footnote 22 have referred to equity (or, interchangeably, ‘equitable considerations’Footnote 23) as a normative proposition capable of affecting the determination of damages in ways not expressly contemplated in Chorzów Factory. Investment tribunals have followed a similar path, invoking equitable considerations for the determination of compensation due for violations of BIT provisions.Footnote 24 What this means in practice is unclear: despite the frequent invocation of equity for the purposes of determining compensation, international courts and tribunals have made little effort to explain the legal basis of these considerations or their underlying methodology.
Arguably, the integration of equitable considerations in quantum analysis presents some significant advantages. From a procedural point of view, it allows for some flexibility in the fact-gathering process and enables the tribunal to award compensation even when objective circumstances preclude the injured party from producing sufficient evidence to substantiate its loss. The ICJ, for example, has invoked equitable considerations for the determination of compensation where the evidence was insufficient to enable a precise quantification, for ‘it would be a perversion of fundamental principles of justice to deny all relief to the injured person, and thereby relieve the wrongdoer from making any amend for his acts.’Footnote 25 From a substantive point of view, the rigid or mechanical application of customary rules governing compensation might also lead to a juridical outcome that places too strong an emphasis on the extent of the injury caused by the wrongful act, in a manner disconnected from the context in which the injury arose, the nature of the unlawful act, or the respective interests and conduct of the parties. Thus, the application of equity to compensation enables the tribunal to ‘infuse’ elements of reasonableness and ‘individualized justice’ in its reasoning,Footnote 26 and arrive at a balanced outcome that accommodates the interests of both parties.
Be that as it may, equitable considerations may also give rise to complications in practice. In fact, an unprincipled application of equity to compensation may have serious repercussions for the legitimacy of the dispute settlement procedure. It might also affect the procedural rights of the parties and, ultimately, undermine the integrity of the decision itself. This complexity is exemplified in the International Centre for Settlement of Investment Disputes (ICSID) framework where ad hoc annulment committees have stated that if a tribunal misapplies the legal rules in favour of a settlement based on ‘general equity’, the award might be subject to annulment for manifest excess of power or a failure to state adequate reasons, within the meaning of Article 52(1)(b) and (e) of the Washington Convention.Footnote 27
Outside the ICSID framework, the application of equitable considerations may also give rise to challenges to recognition and enforcement of arbitral awards. For instance, States have challenged the validity of arbitral awards relying upon equitable considerations before domestic courts, portraying them as attempts at awarding punitive damages in a manner contrary to international law.Footnote 28 Conversely, some municipal courts have attempted at re-opening certain arbitral awards, especially with regard to questions of compensation, invoking ‘equity’, ‘fairness’ or ‘proportionality’ as the legal basis for their judicial review.Footnote 29 This development may have serious implications for the finality of arbitral awards: a broadly-construed conception of ‘equity’ for quantum purposes may in fact be used as the trojan horse to re-open arbitral proceedings and substitute a tribunal’s decision for the views of domestic courts, especially where large monetary awards are at stake.
In light of these challenges and the risk of protracted proceedings, it is imperative to develop an analytical framework for the operation of equity in the determination of compensation by investment tribunals. Against this background, this chapter argues that while investment arbitral tribunals are entitled to apply equitable considerations when determining compensation as a general principle of international law, this possibility is restrained by certain limitations beyond which the award might result in a legal error or an excess of powers. To that end, Section 2 will distinguish between the different forms that equity may take and examine the interpretative function of equity in the framework of compensation. Section 3 will examine the interpretative function of equity in the framework of customary norms of State responsibility, whereas Section 4 will argue that recourse to equity is subject to intrinsic and extrinsic limitations, emanating either from the nature of equity as an interpretative canon or from the procedural framework in which tribunals are bound to operate, respectively.
A few words are in order on the scope of this chapter. For analytical purposes, the term ‘compensation’ should be understood as a pecuniary remedy for the reparation of injury caused by an internationally wrongful act within the meaning of Articles 31 and 36 of ARSIWA. The relationship between equity and other forms of remedies, such as restitution or satisfaction, fall outside the scope of the analysis. In the same vein, equity may also have a bearing on the determination of ‘compensation’ that is due upon liability for injurious, yet lawful acts. Indeed, there are numerous treaty provisions that require the payment of ‘fair’, ‘equitable’ or ‘just’ compensation for acts that are not prohibited by international law, such as the expropriation of foreign investmentsFootnote 30 or the civil liability of economic operators for the harm caused to persons or the environment by hazardous or ultrahazardous activities.Footnote 31 Nevertheless, the interpretation of these treaty-specific provisions is a question of primary, not secondary, norms, which are subject to distinct rationales and present structural legal differences when compared to State responsibility. Thus, the meaning of equity within these treaty-specific regimes falls to be determined by reference to their distinctive teleologies and contextual specificities. Finally, even though equitable considerations are frequently integrated in computational models proposed by valuation expertsFootnote 32 and the methodology employed by tribunals,Footnote 33 this chapter will only address the legal function of equity, as opposed to the use of equity in the process of valuation methodologies.
2 The Legal Basis for the Application of Equity to Compensation
Doctrinal analysis of the concept of equity typically begins with some preliminary questions regarding the normative character of equity and its functions in general international law. It is not, however, the purpose of this chapter to revisit the doctrinal debate surrounding the normativity of equity.Footnote 34 Suffice to say that, throughout the twentieth century, the development of international law has transformed equity from a non-legal conceptFootnote 35 to a general principle of law within the meaning of Article 38(1)(c) of the PCIJ and later ICJ Statute.Footnote 36 As early as 1920, the Advisory Committee of Jurists, tasked with the preparation of the draft Statute for the PCIJ, understood equity as an integral part of international law to be applied by the World Court,Footnote 37 a point subsequently endorsed by the overwhelming majority of scholars and jurisprudence.Footnote 38
Nevertheless, investment tribunals have not clearly articulated the legal basis for the application of equitable considerations to the assessment of damages. In LIAMCO, for example, the tribunal confusingly referred to equity as a ‘general principle of law’ under Article 38(2) of the ICJ Statute, instead of Article 38(1)(c).Footnote 39 In the same vein, the Aminoil Tribunal stated that ‘redress will be ensured ex aequo et bono’ without ‘depart[ing] from principles of law’, in plain contradiction to the terms of Article 38(2) of the ICJ Statute.Footnote 40
It is, however, clear, that the application of equity as a general principle of law should not be confused with a decision ex aequo et bono. In the North Sea Continental Shelf cases, the ICJ drew a distinction between the power of the Court to settle disputes ex aequo et bono and equity as an integral part of international law (equity intra legem).Footnote 41 In Tunisia/Libya, the Court explained that ‘the legal concept of equity is a general principle directly applicable as law.’Footnote 42 The Court, ‘whose task is by definition to administer justice is bound to apply it.’Footnote 43 By contrast, dispute-settlement ex aequo et bono entails that a tribunal may act as an amiable compositeur for the ‘adjustment of the respective interests’ of the parties.Footnote 44 While the latter function requires express agreement by the parties (Article 42(3) of ICSID),Footnote 45 the former is not simply ‘a matter of abstract justice’, but a rule of law capable of generating legal obligations between States.Footnote 46
Within the framework of intra legem equity, the ICJ has drawn a further distinction between equity praeter and infra legem.Footnote 47 Equity praeter legem acquires an autonomous normative function in case of lacunae, ‘in order to remedy the insufficiencies of international law and fill in its logical lacunae.’Footnote 48 Conversely, infra legem equity consists in ‘a method of interpretation of the law in force, and is one of its attributes.’Footnote 49 Leaving aside doctrinal objections against the traditional typology of equity,Footnote 50 this analysis will not focus on the praeter legem of equity: to the extent that the Chorzów Factory standard has received wide-spread acceptance in State practice and jurisprudence as reflecting customary law, it seems untenable to speak of a general ‘gap’ in State responsibility to which praeter legem equity could apply,Footnote 51 although it may always be possible to identify smaller gaps to which praeter legem equity may be of relevance.
Rather, it is the interpretative function of equity that is most pertinent to the customary rules governing the determination of compensation.Footnote 52 Thus, in Amco v Indonesia the ICSID annulment committee dismissed the idea that any mention of ‘equitable considerations’ in the award would necessarily amount to a decision ex aequo et bono, and accepted that equitable considerations may ‘form part of the law to be applied by the Tribunal’ for the purposes of compensation.Footnote 53 In Dogan v Turkmenistan the annulment committee also stated that equitable considerations were ‘inherent (…) in the interpretation of the law applied by the Tribunal.’Footnote 54 The committee in MTD v Chile developed this point further, stating that a tribunal is entitled to ‘tak[e] into account considerations of fairness in applying the law’, given that ‘individual rules of law will often require fairness or a balancing of interests to be taken to account.’Footnote 55
These propositions align with the general understanding of the hermeneutical function of equity as intimately linked with the requirements of good faith and reasonableness. Following a long tradition of jurists,Footnote 56 Schwarzenberger postulates that equity demands ‘reasonableness and good faith in the interpretation and application of treaties’.Footnote 57 For ‘[e]ven in a relatively static environment, the need arises sooner or later to soften the harshness of jus strictum by the infusion of elements of equity and elasticity.’Footnote 58 In the same vein, certain authors have argued that equity may ‘soften’ or ‘temper’ the strict application of positive rules, by ‘infusing elements of reasonableness and ‘individualised’ justice in their interpretation, whenever the applicable law leaves a margin of discretion’,Footnote 59 or as a ‘a normative flexifier [sic] mitigating the rigidity of application of positive international law’.Footnote 60
Insofar as infra legem equity has been mostly theorised at the level of treaty interpretation, the question arises whether its interpretative function extends to customary rules. In this regard, academic authors have raised a series of doctrinal objections against the possibility of interpreting customary norms as such, pointing towards the absence of a written text that could be analysed through the ordinary means of interpretation.Footnote 61 Without further delving into this wider doctrinal debate, it is sufficient to note that the applicability of infra legem equity to compensation has been relatively uncontested in practice: thus, in the Armed Activities case the ICJ made several references to equitable considerations at the reparations stage, and several judges acknowledged that recourse to equitable considerations in determining compensation ‘is an application of equity infra legem’.Footnote 62 In Total v Argentina, the tribunal also noted that ‘[e]quitable considerations in the application of the law, including in performing calculation of damages, pertain to aequitas infra legem (…) and not aequitas praeter legem to use a Latin expression (equity within what the law admits)’.Footnote 63 Indeed, if infra legem equity can affect the interpretation of treaty-based rules, it stands to reason that it can also affect the interpretation of customary norms, which are framed at such level of generality that a further deductive process is required to particularise their content and meaning to the circumstances of each case.Footnote 64 The question, therefore, is not about whether equitable considerations may apply to the interpretation of customary law in abstracto, but rather about how that process comes to bear.
3 Lost and Found: Equitable Considerations in the Law of State Responsibility
Heretofore, academic authors have approached the principle of equity through the lens of primary rules governing inter-State relations, ranging from maritime boundary delimitationFootnote 65 to the exploitation and management of natural resources,Footnote 66 the ‘fair and equitable treatment’ standard in BITs,Footnote 67 or the law of the WTO.Footnote 68 By contrast, much less attention has been paid to the question whether – and if so, how – equity may affect the interpretation of secondary norms governing the consequences of wrongful acts,Footnote 69 even less so compensation.Footnote 70 As noted by Milano, the function of equity in the identification of remedies for wrongful acts
is an aspect of the general principle of equity which has been under- investigated in the literature and one where the relationship between equity itself and the application of the ordinary rules of State responsibility, presumably of a customary nature, becomes crucial.Footnote 71
However, recourse to equitable considerations for compensation purposes is not new.Footnote 72 States have instructed arbitral tribunals and mixed claims commissions to apply ‘equity’ to the assessment of damages arising from foreign claims as early as the 1794 Jay Treaty, where the US and Great Britain mandated the umpire to settle their claims to compensation on the basis of ‘justice, equity and the law of nations’. But even where equity was not expressly mentioned in the arbitral agreement, this did not prevent arbitrators from invoking equity proprio motu for the determination of compensation.Footnote 73 Even though some of these early decisions were rendered ex aequo et bono,Footnote 74 some other tribunals invoked equity within the framework of legal reasoning, either as the normative basis for allowing a claim (praeter legem),Footnote 75 or as a legal principle capable of influencing the interpretation of customary law (infra legem).Footnote 76
Eventually, the concept of equity found its way into the codification efforts of the ILC on the law of State responsibility. Originally, the 1930 Preparatory Committee of the Hague Conference stated in its ‘Basis for Discussion No. 29’ that ‘[r]esponsibility involves (…) an obligation to make good the damage suffered in so far as it results from failure to comply with the international obligation.’Footnote 77 This standard echoes the conventional understanding of the Chorzów Factory judgment that had been rendered by the PCIJ just the previous year. As early as 1956, however, Special Rapporteur Garcia-Amador recognised that, apart from the remedial function of compensation, there may also be some ‘attenuating’, ‘extenuating’ or ‘aggravating’ circumstances that can affect the extent to which a State is bound to compensate for injury caused to aliens in its territory.Footnote 78 This position, which signalled a departure from Chorzów Factory, became clearer in his subsequent reports, where he noted that, while
the basic and at the same time general criterion, is that the reparation should be commensurate with the nature or extent of the actual injury (…) the reparation is not always strictly in keeping with the true nature or extent of the injury. Other factors generally come into play, such as the circumstances in which the injury occurred, the gravity, in special situations, of the act or omission imputable to the respondent State and, on occasion, factors justifying a reduction in the amount of the reparation.Footnote 79
Special Rapporteur Ago did not submit a report on the consequences of internationally wrongful acts before his election to the ICJ. However, when discussing his eighth report on the circumstances precluding wrongfulness, several ILC members observed that, while certain circumstances may not preclude the wrongfulness of an act qua, they may nonetheless operate as mitigating factors for the purposes of reparation.Footnote 80 Special Rapporteur Ago acknowledged this pointFootnote 81 and the commentary to draft Chapter V stated that circumstances precluding wrongfulness ‘must not be confused with other circumstances which might have the effect not of precluding the wrongfulness of the act of the State but of attenuating or aggravating the responsibility entailed by that act’, with regard to the content, form and degree of responsibility.Footnote 82 Even though neither Rapporteur expressly referred to ‘equity’ as the legal basis, they both acknowledged that it was possible for compensation to take into account not only the extent of the injury caused by the wrongful act, but additional factors as well.
The following year, Special Rapporteur Riphagen argued in favour of a ‘qualitative’ and ‘quantitative’ degree of proportionality between the characteristics of the unlawful conduct and the consequences in response thereto, including the level and amount of compensation.Footnote 83 Notably, since the North Sea Continental Shelf cases the ICJ has drawn a connection between the application of equitable principles and a ‘reasonable degree of proportionality’ to be observed by the respective decision-maker.Footnote 84 In the course of the debate on Riphagen’s report, the principle of proportionality was expressly endorsed by some ILC membersFootnote 85 (notably in the context of compensationFootnote 86) but met with scepticism from others.Footnote 87
Equitable considerations resurfaced with greater force at the last stages of the codification process. In his first report to the ILC, Special Rapporteur Arangio-Ruiz described the Chorzów Factory principle as too vague or sweeping a proposition, which does not settle all of potential legal issues involved, such as the ‘relevance of the injured State’s conduct’, of the ‘gravity of the wrongful act’ or the ‘degree of fault of the offending State’.Footnote 88 The following year, however, he explained that ‘[h]e had omitted express references to equity from the report because, as experience showed, such references were apt to be unhelpful. Needless to say, however, equity was implied in all legal rules and formed an essential and integral part of law.’Footnote 89 In his opinion, equity was intimately linked to the relevance of fault, wilful intent or negligence for the purposes of compensation.Footnote 90 In the same vein, other ILC members raised the question of the onerousness of the financial obligation upon the obligor State as an equitable consideration that could justify a proportional reduction of damages in some cases.Footnote 91 The Special Rapporteur expressly acknowledged the role of equity in the assessment of damages, but noted that ‘it might be dangerous to refer expressly to [equity], since it was part and parcel of law and of any legal decision’.Footnote 92 Still, the original Commentary to Article 6bis stated that:
There may be other equitable considerations that militate against full reparation, particularly in cases involving an author State with limited financial resources, but only to the extent that such considerations can be reconciled with the principle of the equality of all States before the law and the corresponding equality of the legal obligations of all States.Footnote 93
It was, therefore, understood that the customary standard of full reparation could be balanced against equitable considerations, which could reduce the extent of reparation, including the amount of compensation. In his third report to the ILC, Special Rapporteur Crawford observed that international jurisprudence reflected
the wide variety of factual situations, the influence of particular primary obligations, evaluations of the respective behaviour of the parties (both in terms of the gravity of the breach and their subsequent conduct), and, more generally, a concern to reach an equitable and acceptable outcome.Footnote 94
When international judges are making a complex judgment such as one regarding the amount of compensation, he observed, ‘equitable considerations will inevitably be taken into account, whether acknowledged or not.’Footnote 95 He warned, however, that, ‘while illustrations can be given of the operation of equitable considerations and of proportionality in international law, the attempt to specify them in detail is likely to fail.’Footnote 96 Given that the ILC was anxious to conclude its codification work before 2001, the Special Rapporteur made no effort to define ‘equitable considerations’ in detail. But the general proposition made it to the final commentary to Article 36 of ARSIWA (albeit with diluted wording), stating that:
As to (…) the principles of assessment to be applied in quantification, these will vary, depending upon the content of particular primary obligations, an evaluation of the respective behaviour of the parties and, more generally, a concern to reach an equitable and acceptable outcome.Footnote 97
It follows that the ILC understood that the customary standard of ‘full reparation’ would not always provide satisfactory solutions and that international tribunals could have recourse to equity, as a general principle of law, for the adjustment of compensation in such a way as to reflect additional factors, such as the parties’ conduct and situation, the content of the primary norm breached, or an evaluation of their respective interests. While most Special Rapporteurs acknowledged the relevance of equity for compensation (including under the rubric of proportionality), it was agreed not to insert an express qualification to the text of the draft articles. However, far from discounting the relevance of equity in favour of a mechanical approach to quantum, the ILC suggested that infra legem equity forms part-and-parcel of the secondary rules of State responsibility and may have a bearing on the level of compensation. This proposition, reflected in the final commentary of ARSIWA after more than 50 years of discussions and buttressed by the contemporaneous and subsequent practice of courts and tribunals, is of key import for the interpretation of the rules governing compensation.Footnote 98
4 Equitable Considerations in Investment Arbitration: Is There a Limit?
In line with the preceding analysis, investment tribunals have, expressly or impliedly, applied equitable considerations to the determination of compensation payable in case of unlawful acts. As early as 1982, for example, the Aminoil Tribunal observed that ‘any estimate in money terms of amounts intended to express the value of an asset, of an undertaking, of a contract, or of services rendered, must take equitable principles into account’.Footnote 99 In Amco v Indonesia, the committee further stated that ‘a tribunal applying international law may take account of equitable considerations in non-maritime boundaries cases’, such as compensation.Footnote 100
While this proposition is generally accepted in the literature,Footnote 101 there seems to be no consensus as to what these ‘equitable considerations’ might be. Commentators, practitioners and tribunals alike have proffered a wide range of factors capable of influencing quantum (well beyond the Chorzów formula), albeit not always invoking equity as the relevant legal basis. On the one hand, it has been suggested that equitable considerations may justify an aggravated amount of compensation, in order to reflect the ‘seriousness’ or ‘gravity’ of the unlawful act,Footnote 102 or the subjective intent (or fault) of the wrongdoer State.Footnote 103 Similar considerations, however, evoked serious objections within the ILC during the codification process that led to the ARSIWA: despite the original proposals to enable damages reflecting the gravity of the breach,Footnote 104 the ILC eventually rejected the idea that compensation be used as a vehicle for the introduction of punitive damages.Footnote 105 The ICJ has also rejected the availability of punitive or exemplary damages, even in those cases involving the most serious violations of international human rights and humanitarian law.Footnote 106
On the other hand, it has been suggested that equitable considerations may warrant an adjustment (or proportionate reduction) of compensation in order to accommodate additional, countervailing considerations, that relate either to the injured party or the wrongdoer State. As regards to the first category, some tribunals have sought to limit the amount of recoverable compensation by reference to the injured party’s conduct that either precedes or follows the wrongful act. For example, in Himpurna v PLN the Tribunal applied the doctrine of abuse of right in favour of the respondent, in order to prevent the claimant’s contractual rights from being extended ‘beyond tolerable norms’, also taking into account PLN’s status ‘as an arm of governmental policy acting in pursuit of the public welfare’. On that basis, it lowered the amount of compensation due referring to ‘equitable principles’.Footnote 107
Conversely, international tribunals have endorsed the proposition that the amount of compensation must be reduced when the claimant has failed to take ‘reasonable steps’ to mitigate the injury caused.Footnote 108 Failure to mitigate damages has been understood as a matter that is notionally distinct from the contributory fault/negligence of the injured party in the occurrence of the wrongful conduct and the emergence of the harm, which is a matter related to the existence of causal nexus.Footnote 109 Insofar as tribunals have based the existence of a ‘duty to mitigate damages’ upon considerations of fairness,Footnote 110 this proposition may be interpreted as a specific form of equitable considerations that comes into play after the occurrence of the harm. In the same vein, the Arbitral Tribunal in the Loan Agreement case emphasised the ‘equitable character’ of the customary norms of compensation, which led the Tribunal to consider not only the ‘technical’ provisions of the treaty and loan agreements, but also the ‘overall circumstances of the case, including the causes of delay, the misunderstandings (…) and generally the specific situation and conduct of both Parties, as well as the totality of the relations of amity and co-operation.’Footnote 111
With respect to equitable considerations relating to the wrongdoer State, it is important to note that recent scholars have argued for the reconceptualisation of investment arbitration from a private-law-type arbitration into a form of ‘public-law adjudication’, which takes into consideration the public functions of the host State vis-à-vis its population in furtherance of the public interest and allows for some flexibility to the host State concerned. The public-law paradigm has found expression in investment arbitration in several ways, such as the principle of proportionality, legitimate expectations and the applicable standard of review.Footnote 112 Similar considerations have found their way into the assessment of damages.Footnote 113 For instance, it has been suggested that investment tribunals should either weigh the level of compensation against legitimate ‘public interest’ considerations motivating the unlawful conduct of the host StateFootnote 114 or consider the circumstances surrounding the wrongful act, such as the occurrence of an armed conflict in the host State’s territory.Footnote 115
Within that context, the potentially ‘crippling’ effect that large sums of compensation may have for a host State’s financial subsistence has been suggested as a potential equitable consideration that is relevant to quantum. In his separate opinion in the quantum phase of CME v Czech Republic, Sir Ian opined that the principles of compensation must be read within the framework of the BIT and noted that ‘[i]t would be strange indeed, if the outcome of a [BIT] took the form of liabilities “likely to entail catastrophic repercussions for the livelihood and economic well-being of the population”’.Footnote 116 Along similar lines, Paparinskis has argued in favour of an exception to the principle of full compensation, with a view to ensuring that ‘[r]emedies serve social as well as individual needs’: to the extent that the bilateralist precepts of corrective justice that underlain Chorzów Factory have gradually evolved in a more communitarian direction, Paparinskis posits that the standard of compensation ‘can be changed in line with the broader structural shifts in modern international law’.Footnote 117 Indeed, in the Armed Activities case the ICJ took note of Uganda’s plea that a large amount of compensation would exceed its capacity to pay and seems implicitly to have endorsed the relevance of this legal ground by reference to the award by the Eritrea-Ethiopia Claims Commission (EECC).Footnote 118 Ultimately, however, the Court was ‘satisfied that the total sum awarded (…) remain[ed] within the capacity of Uganda to pay’, although it ordered the payment of the sum in annual instalments, presumably in order to Uganda’s ability to meet its people’s basic needs.Footnote 119
The foregoing remarks serve to show that equitable considerations are not a monolithic concept but are used as an umbrella term to denote a wide variety of factors and circumstances which have an influence upon quantum. To be sure, a detailed analysis of each these considerations would exceed the limited purpose of this chapter, but a key point stands out: whatever these ‘equitable considerations’ may be, it is suggested that investment tribunals do not have a carte blanche to subvert the customary principle of full reparation on the basis of ‘abstract equity’.Footnote 120 Indeed, it is well settled that an investment tribunal ‘must base its decision on objective and rational considerations which must be stated.’Footnote 121 The US’ strong objections to the application of equitable considerations in the determination of compensation arising from the Norwegian Shipowners case aptly illustrates how an unprincipled application of equity to damages may have serious repercussions on the validity of the arbitral award and the integrity of the process.Footnote 122 As Judge Yusuf stated in the Armed Activities case,
Equitable considerations (…) should be understood within the legal framework governing the judicial function of the Court. They cannot serve as the basis to dispense with the applicable rules altogether, or not to provide reasons for their applicability. The Court should have made an attempt at explaining how it intends to apply equity within the general framework of State responsibility and the procedural framework governing the fact-finding procedure before it’.Footnote 123
On that basis, it is submitted that, whilst infra legem equity may have a bearing on the interpretation of customary norms governing compensation, it is by its nature subject to certain limitations that may either be intrinsic to the ‘general framework of State responsibility’ or extrinsic to it, appertaining to the ‘procedural framework governing the fact-finding procedure’ before the respective court or tribunal. We shall examine these two kinds of limitations in turn.
4.1 Intrinsic Limitations to infra legem Equity
Intrinsic limitations emanate from the nature of equity as a canon of interpretation. As the Institut de Droit International noted in 1937, an international judge may be called upon to consider equitable considerations in the interpretation of norms, ‘to the extent consistent with respect for the applicable law.’Footnote 124 If equity is supposed to operate within the limits of the law, its hermeneutical function must be understood by reference to the limitations applicable to any rule of interpretation. As a cognitive exercise, the process of interpretation is ordinarily restrained by the rule to which it relates and its possible meanings.Footnote 125 Essentially, any method of interpretation involves the selection of a meaning amongst a spectrum of possible meanings within a conceptual radius defined by the widest possible meaning.Footnote 126
Within that hermeneutical process, infra legem equity assists the interpreter in both identifying the outer limits of the norm in question, and in selecting ‘among several possible interpretations of the law the one which appears, in the light of the circumstances of the case, to be closest to the requirements of justice.’Footnote 127 While these analytical choices will not always be clear-cut, it is suggested that a tribunal cannot exceed the conceptual radius of a norm and select a meaning beyond its range on the basis of equitable considerations – for this would result in extending or altering the norm’s content into something else.Footnote 128 Consequently, in the South West Africa cases the ICJ rejected the applicants’ contention that ‘humanitarian considerations [we]re sufficient in themselves to generate legal rights and obligations’ from the applicable treaties.Footnote 129 To do so would exceed the process of interpretation and result in rectification or revision of the treaty, whereas a court of law ‘can take account of moral principles only in so far as these are given a sufficient expression in legal form.’Footnote 130
The interpretative function of equity becomes much more complex in the realm of customary law, precisely because there is no authoritative text to be interpreted.Footnote 131 Depending on the availability and specificity of State practice and opinio juris, customary rules tend to be much more vague and flexible, leaving some scope for debate regarding the precise limits and content of the rule.Footnote 132, Footnote 133 As Merkouris points out, customary rules exist at such level of abstraction that a further deductive process is required to particularise their meaning to the facts of each case.Footnote 134 Thus, customary law affords the decision-maker a wide margin of discretion in interpreting and applying abstract rules to the circumstances of each case. In the absence of textual limitations, it is here that infra legem equity has a key role to play by defining the contours of customary law or providing the basis from which to infer potential qualifications.
This does not mean that the output of the interpretative process will vary along with the proverbial foot of the Chancellor.Footnote 135 Nor should the application of equitable considerations to customary rules be understood as being ‘freed from the moorings of international law (…) drifting towards elusive subjectivism with little room left for the necessary guarantee of the objectivity and predictability of the law.’Footnote 136 While infra legem equity to some extent involves the exercise of discretion,Footnote 137 it forms part of the applicable law and must, therefore, display a minimum degree of consistency. As Jennings observes, no reasonable litigant expects the decision of a court to be predictable; but the range of considerations used for a decision and the procedures or their application should certainly be predictable.Footnote 138
In determining these potential limitations, useful lessons can be drawn from the practice of equitable considerations in other areas of international law. In the North Sea Continental Shelf cases, the ICJ explained that the interpretative function of equity was limited by the object and purpose of the customary principles governing the continental shelf and could not result in the de novo apportionment of maritime areas on the basis of distributive justice.Footnote 139 To hold otherwise would contravene the ‘most fundamental of all the rules of law relating to the continental shelf’.Footnote 140 In Libya/Malta, the Court further stressed the need for consistency and identified potential limitations to the application of equity to maritime delimitation:
Th[e] justice of which equity is an emanation, is not abstract justice but justice according to the rule of law; which is to say that its application should display consistency and a degree of predictability; even though it looks with particularity to the peculiar circumstances of an instant case, it also looks beyond it to principles of more general application. This is precisely why the courts have, from the beginning, elaborated equitable principles as being, at the same time, means to an equitable result in a particular case, yet also having a more general validity and hence expressible in general terms.Footnote 141
On that basis, the Court distinguished between those equitable considerations which are ‘pertinent to the institution of the continental shelf as it has developed within the law’ and may, therefore, qualify for inclusion in the rule (ie, circumstances of a geographical nature), and those ‘which are strange to its nature’ and cannot be used ‘fundamentally’ to alter its character.Footnote 142 Thus, the Court seems to have recognised certain limitations to the interpretative function of equity as a canon by reference to the content of the rule and its teleology.
The ICJ affirmed this proposition in Barcelona Traction, where it rejected Belgium’s contention that the customary rule of diplomatic protection should have been extended to a company’s shareholders on the basis of ‘equitable considerations’.Footnote 143 In so doing, the ICJ emphasised the nature of the customary right to exercise diplomatic protection and explained that any different interpretation would render inoperable the ‘original’ right of the State and severely undermine ‘the stability which it is the object of international law to establish in international relations.’Footnote 144 Thus, the Court implicitly confirmed that equitable considerations cannot be used to justify any possible exception within the interpretation of a customary norm in the framework of State responsibility and it is subject to certain limitations stemming from the rule’s object and purpose.
Extending this logic to compensation for internationally wrongful acts, it is suggested that equitable considerations cannot contradict the object and purpose of the rule, which is to ‘wipe out’, as far as possible, ‘all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed’.Footnote 145 The implications of this point are two-fold. On the one hand, equity cannot circumvent the inherently remedial function of compensation: thus, the invocation of the ‘seriousness’ of the breach, the ‘magnitude’ of the damage, or the ‘wilful intent’ of the host State cannot serve as bases for awarding damages beyond and above the amount of injury suffered by the claimant. Such damages, essentially of an afflictive, punitive or exemplary character are foreclosed under modern international lawFootnote 146 and an award to that effect might be contra legem.Footnote 147 At the same time, however, equitable considerations cannot obviate claims for damages altogether: as the PCIJ explained in Chorzów Factory, compensation constitutes an ‘essential principle contained in the actual notion of an illegal act’. Even if compensation may be adjusted to accommodate a balancing exercise between competing interests at stake, this cannot detract from the core principle that ‘the breach of an engagement involves an obligation to make reparation in an adequate form.’Footnote 148 A different understanding would essentially transform equity into a circumstance precluding wrongfulness, without a clear legal basis.
Within these two extremes, it is quite difficult to pinpoint the extent to which equity may affect quantum in the abstract. Each factor requires an independent legal analysis and a careful application of the customary principle to the facts of each case. But this does not mean that equity is a matter of chance.Footnote 149 Whilst Radi emphasises the ‘casuistic normativity’ of equity for the proposition that it is impossible to define infra legem equity in general legal terms,Footnote 150 international tribunals are required to state the reasons for their decisions, including on their interpretation and application of equity. As the committee stated in Rumeli v Kazakhstan,
It is highly desirable that tribunals should minimise to the greatest extent possible the element of estimation in their quantification of damages and maximise the specifics of the ratiocination explaining how the ultimate figure was arrived at.Footnote 151
Within that wider normative process of trial and error, equity may perform its essential role by introducing elements of flexibility and reasonableness into the law, without departing from the object and purpose of the rule being interpreted. As tribunals continue to expand and rationalise the ways in which equity affects their interpretation of the customary standard of compensation, these judicial pronouncements (and the attitude of States to these interpretations) will tend to harden into rules and legal principles, to the effect that ‘the freedom to frame arguments and frame the reasoning leading to decisions in the court will be correspondingly reduced.’Footnote 152
4.2 Extrinsic Limitations to Equitable Considerations: Between Alchemy and Science
The duty to state reasons brings us to the next point, which is the extrinsic limitations to the interpretative function of equity. Contrary to intrinsic limitations, extrinsic limitations do not relate from the content of the rule being interpreted but rather emanate from the tribunal’s adjudicative authority and the procedural framework in which it is bound to operate. When a tribunal resorts to equity, it can neither exceed the scope of its jurisdiction nor can it disregard certain fundamental rules of procedure upon which its function is conditioned (cf. Article 52(1)(d) ICSID) – at least not without the validity of its decision being impinged. As a result, in Klöckner v Cameroon, the ICSID annulment committee annulled an arbitral tribunal’s award for manifest excess of power inter alia on the basis that the tribunal had reached an ‘equitable estimate’ of damages, using ‘approximate equivalents’, and had, therefore, failed to state reasons as required by Articles 52(1)(e) and 48(3) of the ICSID Convention.Footnote 153
The obligation to state reasons is of key import in the framework of compensation, where equity is typically associated with the lack of sufficient evidence to ascertain the precise extent of the injury.Footnote 154 The valuation of injury caused to long-term investments and commercial undertakings is a complex task, that often involves conflicting methodologies and inadequate evidence.Footnote 155 While it may be feasible to gauge the amount of lucrum cessans on the basis of business records from ongoing concerns, investment disputes frequently arise from still-born projects or failed contracts, where the value of profits can hardly be determined at all. As noted in Santa Elena v Costa Rica, investment tribunals enjoy a wide measure of discretion in making an approximation, ‘taking into account all relevant circumstances (…) including equitable considerations’.Footnote 156
Nevertheless, equitable considerations in the interpretation of the law must not be confused with the ordinary exercise of arbitral discretion in the appreciation of the facts.Footnote 157 As noted in ADM v Mexico, ‘the assessment of damages for lost profits is not a precise science.’Footnote 158 Thus, the discretion of an arbitral tribunal in the calculation of damages arises from the uncertainty of the inquiry into lost profits, involving an inquiry with a counterfactual premise, namely, the consideration of the profits that would have been made if an illegal act – which did in fact occur – had not occurred.Footnote 159 In order to make these complex factual determinations, the tribunal will have to consider documentary evidence, witness testimony, admissions against interest, as well as expert reports and shall be the judge of the admissibility of any evidence adduced and of its probative value.Footnote 160 Inevitably, the assessment of the facts lies within the arbitrator’s free evaluation of evidence (also known as the conviction intime du juge).Footnote 161 While this should be guided by a spirit of fairness, it is difficult to lay down precise legal rules of international law, upon which infra legem equity may come to bear as an interpretative canon.
By contrast, equitable considerations might affect the interpretation of the procedural rules governing the fact-finding process,Footnote 162 especially since investment tribunals consider themselves not to be bound to adhere to strict judicial rules of evidence.Footnote 163 In line with international case-law,Footnote 164 tribunals have relied upon equity to suggest that the fact that damages cannot be settled with certainty is no reason not to award damages when a loss has incurred.Footnote 165
In this regard, tribunals have drawn a distinction between the allocation of the burden of proof and the standard of proof. It is well established that the claimant bears the onus to establish the conditions required by substantive law to corroborate a claim for damages.Footnote 166 The claimant must not only bring evidence in support of its allegations but must also convince the tribunal of their truth, lest they be disregarded for want, or insufficiency, of proof.Footnote 167 However, as the ICJ pointed out in Diallo, this rule may be applied flexibly in certain cases, especially where the respondent may be in a better position to establish certain facts.Footnote 168 Given that tribunals have a relative freedom as to the allocation of the burden of proof,Footnote 169 equitable considerations may therefore warrant a shifting of the burden of proof, where the establishment of certain facts lies within the power of the respondent,Footnote 170 or where a party has impeded access to material evidence.
The Archer Daniels Tribunal took this reasoning a step further, noting that ‘failure of a claimant to prove its damages with certainty, or to establish its right to the full damages claimed, does not relieve the tribunal of its duty to assess damages as best it can on the evidence available’ (emphasis added).Footnote 171 This ‘duty’, endorsed by subsequent investment tribunals in compensation proceedings,Footnote 172 implies a gradual departure from the adversarial model of arbitration into a more inquisitorial system, a proposition that may have far-reaching implications for investor-State dispute settlement.Footnote 173 As Lord Neuberger has observed, ‘an increase in arbitral powers must be accompanied by an increased responsibility’.Footnote 174 As mega-awards intimating claims over USD one billion plus continue to emerge, it seems likely investment tribunals will assert more control over the assessment of claims that may have serious impact on tax-payers’ resources.Footnote 175 The progressive recognition of investment arbitration as a form of public law adjudication might require tribunals to take a more active role in quantum, inquiring into possible mitigating circumstances for the assessment of compensation. Thus, when faced with a (relatively modest) claim of about USD 22 million against war-torn Zaire, the AMT Tribunal took the formal step of appointing a former World Bank official as an independent expert to evaluate damages suffered by the claimant, invoking ‘its discretionary and sovereign power to determine the quantum of compensation’.Footnote 176 Such recourse to external expertise may provide as a legitimate alternative when the evidence on the record is not sufficient to justify a precise amount of compensation, as shown in the Armed Activities case, where the ICJ relied upon the analyses of two Court-appointed for the purposes of determining compensation for the loss of life and natural resource. However, it may also give rise to objections as unfairly interfering with the allocation of the burden of proof and tilting the balance in favour of one Party to the detriment of the other, contrary to the principles of a fair hearing and equality of arms and outsourcing the tribunal’s function to the experts.Footnote 177
On the other hand, investment tribunals have lowered the standard of proof invoking equitable considerations as the basic justification. In Crystallex v Venezuela, for example, the Tribunal distinguished between the existence of damage as a fact that must be proven ‘with certainty’ and the precise quantification of that damage which is not subject to the same degree of certainty, ‘because any future damage is inherently difficult to prove.’Footnote 178 Similarly, the Tribunal in Lemire v Ukraine observed that ‘less certainty is required in proof of the actual amount of damages; for this latter determination claimant only needs to provide a basis upon which the tribunal can, with reasonable confidence, estimate the extent of the loss.’Footnote 179 In Impregilo, the Tribunal also held that it would be unreasonable to require precise proof of the extent of the damage caused. Instead, reasonable probabilities and estimates would suffice as a basis for compensation.Footnote 180 The same principle was expressed by the EECC, which applied a differentiated standard of proof between the merits and the reparation phase:
The Commission has required clear and convincing evidence to establish that damage occurred, within the liability parameters of the Partial Awards. However, for purposes of quantification, it has required less rigorous proof. The considerations dictating the ‘clear and convincing standard’ are much less compelling for the less politically and emotively charged matters involved in assessing the monetary extent of injury.Footnote 181
Again, however, a balance must be struck between competing interests. The function of procedural equity is limited by the requirements of due process from which a tribunal may not detract. As the Iran-US Claims Tribunal recalled in Amoco, ‘[o]ne of the best settled rules of the law on international responsibility of States is that no reparation for speculative or uncertain damage can be awarded.’Footnote 182 In the Tribunal’s view, international law does not permit the use of a method which yields uncertain figures for the valuation of damages, even if the existence of damages is certain.Footnote 183 Thus, investment tribunals have generally rejected possible but contingent and indeterminate damages in the absence of evidence.Footnote 184 In Diallo, the ICJ also affirmed that, whilst an award of compensation relating to loss of future earnings inevitably involves some uncertainty, ‘such a claim cannot be purely speculative’.Footnote 185 Nevertheless, as the Tribunal held in Achmea I, the requirement of proof must not be impossible to discharge. Nor must the requirement for reasonable precision in the assessment of the quantum be carried so far that the search for exactness in the quantification of losses becomes disproportionately onerous when compared with the margin of error.Footnote 186 Indeed, compensation matters are not capable of precise quantification because they depend on the exercise of judgmental factors that are better expressed in approximations or ranges.Footnote 187 That is particularly so where the absence of evidence is a result of the behaviour of the author of the damageFootnote 188 or results from a failure of the claimant to present its case. These are equitable considerations that require a further analysis, depending on the procedural framework governing the arbitral process.
5 Conclusion
In 1939, Winston Churchill described Russia’s foreign policy during World War II as ‘a riddle wrapped in a mystery inside an enigma’.Footnote 189 There might be no better phrase to describe the use of equitable considerations by investment arbitral tribunals in the process of determining damages for violations of international law. This chapter may have been unable fully to unravel that mystery, but some useful lessons can be drawn. By now, the Chorzów Factory standard has been widely recognised as reflecting the customary standard governing reparation, but customary rules do not operate in a legal vacuum. International courts and tribunals have progressively acknowledged the general principle of equity as normative proposition capable of affecting the interpretation of customary norms, including secondary rules governing State responsibility. Even though the ILC avoided to articulate an express rule to that effect, it was well understood that equitable considerations had a role in the determination of compensation either as ‘aggravating’ or ‘mitigating’ circumstances.
Yet, infra legem equity is not unbound: it is subject to certain limitations that may either be intrinsic to its nature as an interpretative canon, or stemming from the procedural framework governing the function of the tribunal. Within these parameters, equity is not a magic spell that elides rational conceptualisation; to hold otherwise could have serious implications to the interpretative process and undermine the integrity of the procedure itself. And while it may be true that the assessment of damages is not always a precise science,Footnote 190 the opposite also holds true: ‘[e]quitable principles should not be used to make good the shortcomings in a claimant’s case by being substituted for evidence which could have been produced if it actually existed: equity is not alchemy.’Footnote 191
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