Executive Summary

State responsibility, a public international law concept, is similar to liability, which arises when conduct attributable to a state constitutes a breach of an international obligation of the state, such as an investment treaty obligation. The mere fact that an enterprise is owned by the state is not enough to entail state responsibility; state responsibility for such conduct can arise, however, when a state-owned enterprise exercises elements of state authority, or is directed or controlled by the state.

Whether state conduct is characterised as lawful or unlawful under the internal law of the state does not affect the characterisation of the same conduct under international law. Certain circumstances, such as “necessity”, nevertheless may preclude the wrongfulness of state conduct that is inconsistent with an international obligation, albeit without prejudice to the question of compensation for any material loss caused by the conduct. When a state is responsible for an internationally unlawful act, the state typically is obligated to cease the act and to make full reparation for the injury caused by the act.

1.0 Responsibility of States for Internationally Wrongful Acts

The term “state responsibility” for internationally wrongful acts is a public international law concept similar to “liability”. The law of state responsibility does not set out particular standards of conduct such as those that apply to expropriation, national treatment, or most-favoured-nation treatment; rather, it defines principles to determine whether a state may be “responsible” for a breach of an applicable legal standard and the consequences of such responsibility.

The rules of state responsibility and attribution determine whether a state may be “responsible” for a breach of any applicable standards of conduct, such as the standards of state conduct set forth in an investment treaty.

The principle of state responsibility has played an important role in several well-known investment disputes where the tribunal ruled, in full or in part, against a state and in favour of an investor.1

2.0 The Rules of State Responsibility and Attribution

The International Law Commission’s Draft Articles on the Responsibility of States for Internationally Wrongful Acts (“ILC Articles”), which are the generally accepted authoritative source regarding the international law of state responsibility,2 “formulate, by way of codification and progressive development, the basic rules of international law concerning the responsibility of States for their internationally wrongful acts”.

[Page110:]

The ILC Articles set forth three general principles of the international law of state responsibility: (1) the basic responsibility of states for internationally wrongful acts; (2) the elements of an internationally wrongful act; and (3) the characterisation of an act of a state as internationally wrongful.

First, “Every internationally wrongful act of a State entails the international responsibility of that State.” This principle appears as Article 1 of the ILC Articles and establishes the basic responsibility of a state for its internationally wrongful acts.3

Second, Article 2, which is entitled “Elements of an internationally wrongful act of a State”, provides that “There is an internationally wrongful act of a State when conduct consisting of an action or omission: (a) is attributable to the State under international law; and (b) constitutes a breach of an international obligation of the State.”4

Third, Article 3 provides that “[t]he characterization of an act of a State as internationally wrongful is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law.”5

2.1 Attribution to a State

Sub-paragraph (a) of Article 2 requires a legal analysis to determine whether the conduct of a person or entity may be deemed to be conduct attributable to a state. States are generally responsible for actions of their legislative, executive, and judicial arms (these are known as “state organs”). An order by a court, for example, would generally be considered an act of the state and therefore a basis for state responsibility, irrespective of the independence that the judiciary may have from other branches of government under the domestic law of the state. Decrees issued by members of the Executive Branch, such as attorneys-general or ministers, are also usually attributable to the state.

Unless the action can be attributed to the state, it cannot be deemed to have committed an allegedly wrongful act and thus cannot be “responsible” for such an act. This principle holds true for investor-state disputes.

Attribution of conduct of the state organs to the state is relatively uncontroversial. More complex are situations where an entity does not squarely qualify as a state organ such as a state-owned enterprise, discussed below.

2.1.1 State Agencies and State-Owned Enterprises

Modern states use a variety of agencies, including independent state-owned enterprises (SOEs), to implement their plans. SOEs may have separate legal personality and may operate without interference or control by the main state organs.

The action of an SOE ordinarily would not be attributable to its parent state, unless the action was performed on the instructions of, or under the directions or control of, the parent state.6 The parent state typically will also be responsible for conduct by an SOE when the SOE exercises elements of state authority.7 For example, an SOE may enter into a contract to procure goods and services; a simple contractual breach, such as non-payment of an invoice, normally would not be attributable to the parent state under international law (even though such a breach may generate liability for the SOE under domestic law).8

[Page111:]

Although the actions of a state-owned enterprise typically would not be attributable to the parent state, if an SOE exercises elements of state authority, the parent state may be subject to responsibility for conduct of the SOE, including potentially under an investment treaty.

2.2 Breach of International Obligation

Sub-paragraph (b) of Article 2 requires breach of an international obligation by the state for responsibility to arise. In this respect, Article 12 specifies that a breach of an international obligation by a state occurs “when an act of that state is not in conformity with what is required of it by that obligation, regardless of its origin or character.”11 Article 13 notes that “An act of a state does not constitute a breach of an international obligation unless the state is bound by the obligation in question at the time the act occurs.”12 These principles are relevant when state conduct preceded the date when an investment treaty entered into force. For example, suppose that a state implemented a measure before an investment treaty entered into force,13 but judicial proceedings relating to the measure occurred after the entry into force of the investment treaty. In these circumstances, state responsibility under the investment treaty generally could be based only on state conduct that took place after the investment treaty entered into force, unless the investment treaty were to provide for a deviation from the generally applicable rule in Article 13.14

2.3 Internationally Wrongful

The third and final of the three general principles under the ILC Articles is set forth in Article 3 (“Characterization of an act of a State as internationally wrongful”), which provides that “The characterization of an act of a State as internationally wrongful is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law.”15 Under this principle, while “the content and application of internal law will often be relevant to the question of international responsibility,”61“conduct which is characterised as wrongful under international law cannot be excused by reference to the legality of that conduct under internal law.”17 For example, even if domestic legislation were to authorise a state to confiscate private property for public use without compensation, the mere fact that the action was legal under domestic law would not preclude responsibility of the state under international law.

Whether conduct of a state is lawful according to the internal (domestic) law of the state does not determine whether the same conduct complies with the state’s investment treaty obligations.

2.4 Circumstances Excusing Wrongfulness

There are six circumstances where conduct by a state that otherwise would constitute a breach of an international obligation may not be wrongful: consent, self-defence, countermeasures,18 force majeure, distress, and necessity.19

[Page112:]

The six circumstances “do not annul or terminate the obligation; rather they provide a justification or excuse for non-performance while the circumstance in question subsists.”20 Their presence in a case is “without prejudice” to “the question of compensation for any material loss caused by the act in question.”21 “‘[M]aterial loss’ is narrower than the concept of damage,” and “[i]t will be for the State invoking a circumstance precluding wrongfulness to agree with any affected States on the possibility and extent of compensation payable in a given case.”22

Of the six grounds, states have most commonly invoked the “necessity” exception in investor-state arbitration.23 Under customary international law as expressed in the ILC Articles, there are several requirements to invoke “necessity” as a circumstance precluding wrongfulness of state conduct:

[T]hat … the act: (a) is the only way for the State to safeguard an essential interest against a grave and imminent peril; and (b) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if: (a) the international obligation in question excludes the possibility of invoking necessity; or (b) the State has contributed to the situation of necessity.24

Arbitral tribunals have been divided as to whether these requirements should also apply to treaty provisions that deal with emergency situations. The Argentine government invoked investment treaty provisions relating to necessity in emergency situations, at times successfully, while defending against investor claims following the 2001–2002 Argentine financial crisis.

3.0 Legal Consequences of State Responsibility

Under international law, a state is obligated to cease an internationally unlawful act. Further, a state generally has an obligation “to make full reparation for the injury caused by the internationally wrongful act.”28 The responsible state must endeavour “to wipe out 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.”29 This obligation arises under the customary international law of state responsibility and, as a result need not be expressly articulated in a treaty.30 Chapter 23 of this volume discusses further the application of the full reparation principle in international investment law.

[Page113:]

Notes

1
1. See, e.g., Emilio Agustín Maffezini v Kingdom of Spain (Decision of the Tribunal on Objections to Jurisdiction), ICSID Case No ARB/97/7 (25 January 2000) and the Award in the same case dated (13 November 2000). See also Salini Costruttori S.p.A. and Italstrade S.p.A. v Kingdom of Morocco (Decision on Jurisdiction), ICSID Case No. ARB/00/4 (23 July 2001). See generally Kaj Hober, State Responsibility and Attribution, appearing in The Oxford Handbook of International Investment Law, Muchlinski, Ortino and Schreurer (eds.), Oxford University Press (2008) and

2
2. James Crawford, “Articles on Responsibility of States for Internationally Wrongful Acts”, United Nations Audiovisual Library of International Law, http://legal.un.org/avl/ha/rsiwa/rsiwa.html. See “Draft Articles on Responsibility of States for Internationally Wrongful Acts with Commentaries” (“ILC Articles with Commentaries”), http://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf.

3
3. ILC Articles with Commentaries, Article 1 and Comment 1.

4
4. Id. Article 2.

5
5. Id. Article 3.

6
6. Id. Article 8.

7
7. Id. Article 5.

8
8. See generally, Michael Feit, Responsibility of the State under International Law for the Breach of Contract Committed by a State-Owned Entity, 28 Berkeley Journal of International Law 142 (2010).

9
9. Emilio Agustín Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, Award, para. 52 (13 November 2000).

10
10. Id. paras. 58-83 (13 November 2000).

11
11. ILC Articles with Commentaries, Article 12.

12
12. Id. Article 13

13
13. Sometimes a measure may consist of a series of actions, none of which is individually sufficient to constitute an act in breach of an obligation, but that jointly may constitute such act. An example is when several small steps by a state are alleged to lead eventually to a full deprivation of property, referred to as a “creeping” expropriation. In such cases, Article 15 states that a breach occurs “when the action or omission occurs which, taken with the other actions or omissions, is sufficient to constitute the wrongful act.” Id. Article 15(1).

14
14. Id. Article 55 (“These articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or the content or implementation of the international responsibility of a State are governed by special rules of international law.”)

15
15. Id. Article 3.

16
16. Id. Article 3, comment 7.

17
17. Id. Article 3, comment 8.

18
18. In the context of the international law of state responsibility, “countermeasures” refer to “measures that would otherwise be contrary to the international obligations of an injured State vis-a-vis the responsible State, if they were not taken by the former in response to an internationally wrongful by the latter in order to procure cessation and reparation [of the wrongful act].” Id. Part 3, Ch. II, comment 1. The conditions for and limitations on the taking of countermeasures are set forth in Articles 49–54 of the ILC Articles. See Id., Part 3, Ch. II, comment 1 & Arts. 49–54. Whether the ILC Articles relating to countermeasures reflect customary international law has been subject to debate. See, e.g., James R. Crawford, State Responsibility, Max Planck Encyclopedia of Public International Law, para. 51 (2006) (describing the ILC Articles relating to countermeasures as “the most controversial aspect of the text” and noting “the very inclusion of countermeasures” as “[t]he most fundamental concern”).

19
19. See ILC Articles with Commentaries, Part 2, Ch. V, comment 1 & Arts. 20–25.

20
20. Id. comment 2.

21
21. Id. Article 27.

22
22. Id. Comments 4 and 6.

23
23. Cargill, Inc. v United Mexican States, ICSID Case No. ARB(AF)/05/02, Award, paras. 379–430 (18 September 2009); Corn Products Int’l, Inc. v United Mexican States, ICSID Case No. ARB(AF)/04/01, Decision on Responsibility, paras. 144–91 (15 January 2008); Archer Daniels Midland Co. and Tate & Lyle Ingredients Americas, Inc. v United Mexican States, ICSID Case No. ARB(AF)/04/05, Award, paras. 110–80 (21 November 2007). In the context of a discussion of domestic law, an ICSID tribunal noted that the Commentary to the ILC Articles states that “‘[f]orce majeure does not include circumstances in which performance of an obligation has become more difficult, for example due to some political or economic crisis.’” Sempra Energy Int’l v Argentine Republic, ICSID Case No. ARB/02/16, Award, para. 246 (28 September 2007) (quoting ILC Articles with Commentaries, Article 23, comment 3) (annulled on other grounds). In another ICSID arbitration proceeding, the claimants pre-emptively argued that the respondent state should not be able to rely on any force majeure, duress, or necessity defence under the ILC Articles; the Tribunal observed that such defences “could also [have] come into play” had they been pled. Ioan Micula, Viorel Micula and others v Romania, ICSID Case No. ARB/05/20, Award, paras. 299–301 & 329 (11 December 2013). Among the other five circumstances precluding wrongfulness, the authors are aware only of a respondent-state in an investor-state arbitration invoking “countermeasures” (unsuccessfully).

24
24. ILC Articles with Commentaries, Article 25.

25
25. Continental Casualty v Argentine Republic, ICSID Case No. ARB/03/9, Award, para. 167 (5 September 2008); but see Sempra Energy Int’l v Argentine Republic, ICSID Case No. ARB/02/16, Award, para. 378 (28 September 2007), annulled, Decision on the Argentine Republic’s Application for Annulment of the Award, paras. 196–223 (29 June 2010).

26
26. Cont’l Cas. v Argentine Republic, ICSID Case No. ARB/03/9, para. 196.

27
27. Id. para. 304.

28
28. ILC Articles with Commentaries, Article 31.

29
29. Id. Article 31, comment 3, quoting Factory at Chorzów (Ger. v Pol.), Jurisdiction, 1927 P.C.I.A. Series A No. 9 (26 July1927).

30
30. Id. Article 31, comment 1, quoting Factory at Chorzów (Ger. v Pol.), Jurisdiction, 1927 P.C.I.A. Series A No. 9 (26 July 1927) (“Reparation […] is the indispensable complement of a failure to apply a convention and there is no necessity for this to be stated in the convention itself.”)