Master’s Thesis
Protecting Investments in a Legal Vacuum
Application of International Investment Agreements to Unlawfully Annexed Territories
Student name: Nataliia Demchuk
Student email: nataliia.demchuk@student.uva.nl
Student number: 11064145
Master track: International Trade and Investment Law Name of supervisor: Prof. Dr. Stephan Schill
Abstract
This paper analyses the applicability of international investment agreements to annexed territories. More specifically, it is trying to answer the question of whether international investment tribunals have jurisdiction over claims brought by investors in annexed territories and whether the annexing State can be held responsible under its investment treaties for any breaches of investment safeguards in the annexed territory. In doing so, it uses the example of Crimea’s illegal annexation and investor-State disputes that followed as a starting point for its analysis.
At first sight, it may appear that the annexation of a certain territory can result in a legal void in which foreign investors are left unprotected. States are not allowed to recognise the applicability of investment treaties in disputed territories by virtue of the duty of non-recognition and the treaties formerly applied to the territory do not always offer effective protection. To rely on the annexing State's investment agreements, investors need to satisfy a territorial nexus common to every investment treaty. Other issues precluding investors from successfully invoking their rights under investment treaties are the principle of non-retroactivity and the doctrine of indispensable parties. This essay examines these doctrines as well as the moving treaty frontiers rule and the extraterritorial application of international treaties. It also addresses the possibility of taking recourse against the ousted State.
In essence, it attempts at finding solutions to the annexation-investment dilemma. The dilemma is the conflict between two interests - the interest of the international community to prevent unlawful annexation and the investor’s right to protection under investment treaties. This paper concludes that international law may offer a way out of the legal vacuum created by annexation.
Keywords: investor-State arbitration, international investment agreements, annexation, the
law of occupation, the moving treaties frontier rule, extraterritorial application of investment treaties, the obligation of non-recognition, the principle of non-retroactivity, the Monetary
Table of Contents
1 INTRODUCTION ... 4
2 SETTING THE SCENE: LEGAL FRAMEWORK ... 9
2.1 The role of international investment agreements in a nutshell ... 10
2.2 Crimea arbitrations and other examples ... 11
2.3 Investors in a legal vacuum: the issue explained ... 15
2.4 The illegal annexation of territory ... 16
2.5 The law of occupation ... 18
2.6 Presumption of continuity of treaties ... 19
3 RECOURSE AGAINST A DE JURE SOVEREIGN ... 21
4 THE TERRITORIAL SCOPE OF INVESTMENT TREATIES ... 25
4.1 Obligation of non-recognition ... 26
4.2 Territorial application of investment treaties ... 32
4.3 Extraterritorial application of investment treaties ... 35
5 THE TEMPORAL SCOPE OF INVESTMENT TREATIES ... 42
6 THE MONETARY GOLD PRINCIPLE ... 45
7 CONCLUSION ... 50 8 BIBLIOGRAPHY ... 53 8.1 Primary Sources ... 53 8.1.1 Legislation ... 53 8.1.2 Case law ... 55 8.2 Secondary Sources ... 58
Table of Abbreviations
BIT Bilateral Investment Treaty ECT Energy Charter Treaty
ECtHR European Court of Human Rights
FCN Treaties Friendship, Commerce, and Navigation Treaties
ICCPR The International Covenant on Civil and Political Rights
ICESCR The International Covenant on Economic, Social and Cultural Rights ICJ International Court of Justice
IIA International Investment Agreement
ILC United Nations’ International Law Commission MIT Multilateral Investment Treaty
MTF Rule Moving Treaty Frontiers Rule
NAFTA North Atlantic Free Trade Agreement
UN United Nations
UN GA United Nations General Assembly VCLT Vienna Convention on Law of Treaties
1 INTRODUCTION
On 21 March 2014, the Russian State Duma officially passed the Federal Law Admitting to the Russian Federation the Republic of Crimea.1 On 21 March 2014, all Ukrainian investors
with investments in Crimea in an instant changed their status from domestic to foreign investors. Investment arbitrations started by Ukrainian investors against Russia in the aftermath of Crimea's annexation raised important questions as to the applicability of international investment agreements to the disputed territories.
Following the occupation and annexation of Crimea, Russia has been condemned by the majority of States and has faced economic and political sanctions. The interstate territorial dispute between Ukraine and the Russian Federation has not been definitively resolved. Although Russia claims Crimea to constitute part of its territory, the international community does not recognise its sovereignty over Crimean Peninsula. Nevertheless, one cannot deny de facto control of the Russian Federation over Crimea. Ukraine, on the other hand, does not exercise any effective control over the territory. Crimea is not the only example of the annexed territory with an unresolved conflict of law and fact which is likely to continue for an extended period. Other examples include the current Nagorno -Karabakh conflict between Armenia and Azerbaijan2; Israel’s annexation plan for the occupied West
1 The Federal Constitutional Law of the Russian Federation No. 6-FK3 “On Admitting the Republic of Crimea
to the Russian Federation and Forming New Subjects of the Russian Federation - the Republic of Crimea and the Federal City of Sevastopol” [2014]
2 Council on Foreign Relations, 'Nagorno-Karabakh Conflict' (Global Conflict Tracker, 2020)
Bank3; Russia's presence in the Transnistria region of Moldova4 and the Donbas area of Ukraine5.
These cases of illegal annexation and disputed territories are important not only from the public international law but also from the international investment law perspective. Although the legal impact of the change of effective control over a certain terr itory has, to some extent, been addressed by legal scholars and practitioners, one cannot deny that the case of Crimea investment claims is a novel one.
Before arbitral tribunals can decide on the merits of these cases, they would have to affirm their jurisdiction to hear the claims, which effectively means that they must conclude that Crimea forms part of the Russian territory. This is contrary to the principle that annexation cannot give a right to a valid legal title over a territory. The unresolved question of the scope of application of international investment agreements to disputed territories can inevitably lead to the legal vacuum in which foreign investors and their investments would be left without protection.
Investment tribunals deciding on cases involving illegally annexed territories are faced with unique and unprecedented jurisdictional and procedural hurdles, and this work aims to address them. In particular, the research question of this essay is:
“Do investment tribunals have jurisdiction over the claims brought by investors in annexed
territories under international investment agreements?”.
3 The Office of the High Commissioner for Human Rights (UN Human Rights), 'Israeli annexation of parts of
the Palestinian West Bank would break international law – UN experts call on the international community to ensure accountability' (The Office of the High Commissioner for Human Rights (UN Human Rights),16 June 2020)<https://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=25960&LangID=E> accessed 28 September 2020
4 Andrew Gardner, 'Russia to annex Transnistria?' (Politico, 9 March 2019)
<https://www.politico.eu/article/russia-to-annex-transnistria/> accessed 28 September 2020
5 Council on Foreign Relations, 'Conflict in Ukraine' (Global Conflict Tracker, 2020)
For this study, three different categories of investment claims can be distinguished. First, claims by third-country investors against the ousted State under the investment treaty concluded by the third State and the ousted State. For example, claims by Dutch investors against Ukraine under the Netherlands-Ukraine BIT. Second, claims by third-country investors against the annexing State under the investment treaty concluded by the third State and the annexing State. For example, claims by Dutch investors against Russia under the Netherlands-Russia BIT.6 Finally, claims by investors of the ousted State against the annexing State under the investment treaty concluded by these two states. For example, claims by Ukrainian investors against the Russian Federation under the Russia-Ukraine BIT. In the unlikely scenario that investors of the ousted State bring claims against the ousted State itself (for example, Ukrainian investors in Crimea against Ukraine), their claims will be governed by national investment law. As such, these claims are of no interest to the present research.
After identifying the research object, it is important to briefly describe the methodology used to conduct this research. The research strategy of this paper is doctrinal. This means that it will examine the wording of several international legal instruments as well as the rationale of some of the prominent decisions to determine whether investment treaties can apply to annexed territories. This research will conduct the interpretative study of a specified issue. It will be based on analysing the relevant legal rules of public international law and international investment law. The sources used in this research are mostly sources of international law, such as the Vienna Convention on the Law of Treaties and the International Court of Justice judgment in the Monetary Gold case. This work will also
6 At the time of writing, only Ukrainian investors have asserted investment claims in the context of Crimea
arbitrations. To date, there is no record of arbitral proceedings started by an investor of a third State. The reason for this seems to be that Russia has not taken any adverse actions against third-State investors. The nationalisation measures by the Crimean and Russian authorities have been directed towards Ukrainian investors only, not least because of political reasons. However, the possibility of such claims should not be excluded.
closely examine the wording of the Russia-Ukraine BIT. Another important source is the contribution of legal scholars on the topic.
The goal of this research is to analyse the relationship between the change of control over a certain territory and the scope of application of investment treaties to this territory through the public international law lens. This paper purports to find answers and solutions to complex legal issues arising in the context of disputed territories and investment protection. Several investment tribunals have already addressed some of these issues in the so-called Crimea investor-State arbitrations.7 However, these decisions remain largely confidential. It
is important to continue discussing and debating this topic, as the findings can contribute immensely to the resolution of future disputes. After all, international investment arbitration does not know the rule of binding precedent, and other arguments may arise in other factual settings.
Although only a few years ago the relationship between the annexation of territory and territorial scope of investment treaties was considered terra nullius within international legal scholarship8, much ink has been spilled on this topic since the issue arose in Crimea investment arbitrations. This case has gained the attention of many legal scholars and investment arbitration lawyers. Accordingly, several authors have engaged in a detailed analysis of the issue from different perspectives.9 However, the current literature on the topic
7 For example, see Luke Eric Peterson, 'In Jurisdiction Ruling, Arbitrators Rule that Russia Is Obliged under
BIT to Protect Ukrainian Investors in Crimea Following Annexation' (IA Reporter, 9 March 2017) <https://www.iareporter.com/articles/in-jurisdiction-ruling-arbitrators-rule-that-russia-is-obliged-under-bit-to-protect-ukrainian-investors-in-crimea-following-annexation/> accessed 6 September 2020
7 Swiss Federal Tribunal Case No. 4A_396/2017 PJSC Ukrnafta v. Russia; Swiss Federal Tribunal Case No.
4A_396/2017 and Stabil LLC and others v. Russia; Sebastian Perry, 'Russia fails to overturn Crimea awards' (Global Arbitration Review, 18 December 2019)<https://globalarbitrationreview.com/article/1212232/russia-fails-to-overturn-crimea-awards> accessed 23 August 2020
8 Richard Happ and Sebastian Wuschka, ‘Horror Vacui: Or Why Investment Treaties Should Apply to Illegally
Annexed Territories’ [2016] 33(3) Kluwer Law International pp. 253
9 See, for example, Nataliia Tuzheliak, 'Investors at Conflict's Crossroads: An Overview of Available
is still lacking. Although a number of authors have discussed the effects of unlawful annexation on the territorial application of investment treaties, the literature does not sufficiently cover three important elements. First, to my best knowledge, the temporal scope of investment treaties is briefly discussed only by a couple of authors.10 Second, only a few academics have examined the application of the Monetary Gold principle to investment tribunals seized of disputes regarding investments on annexed territories.11 Lastly, a limited
number of scholars have only briefly analysed the possibility of taking recourse against the original or de jure sovereign.12 The present research attempts at discussing all three of these
elements. It is also important to note that there is hardly a consensus on the topic and most scholars seem to have differing views. Some are strong advocates of the strict application of the obligation of non-recognition13, others call for more flexibility with a view to
Jurisprudence; Odysseas G. Repousis, 'Why Russian investment treaties could apply to Crimea and what would this mean for the ongoing Russo–Ukrainian territorial conflict' [2016] 32(27) Arbitration International; Tobias Ackermann, Investments Under Occupation: The Application of Investment Treaties to Occupied Territory. in Fach Gómez and others (eds), International Investment Law and the Law of Armed Conflict (Springer International Publishing 2019)
10 Katharina Wende, 'The Application of Bilateral Investment Treaties in Annexed Territories: Whose BITs
Are Applicable in Crimea after Its Annexation' [2016] 29(133) Hague Yearbook of International Law 133-170; Olga Kuchmiienko, How does the Change in Effective Control over Territory Influence the Application of the Ukraine-Russia and Other BITS? To BIT or NOT TO BIT?. in Klausegger and others (eds), Austrian Yearbook on International Arbitration 2020 (Manz’sche Verlags- und Universitätsbuchhandlung 2020) 552-553
11 See, for example, Sebastian Wuschka, Investment Claims and Annexation of Territory: Where General
International Law and Investment Law Collide?. in Mesut Akbaba and Giancarlo Capurro (eds), International Challenges in Investment Arbitration (Routledge 2018)
12 See, for example, Yaroslav Kryvoi and Maria Tsarova, 'Protecting Foreign Investors in Crimea: Is
Investment Arbitration an Option?' (CIS Arbitration Forum, 29 July 2014)
<http://www.cisarbitration.com/2014/07/29/protecting-foreign-investors-in-crimea-is-investment-arbitration-an-option/> accessed 23 November 2020
13 Patrick Dumberry, 'Requiem for Crimea: Why Tribunals Should Have Declined Jurisdiction over the Claims
of Ukrainian Investors against Russian under the Ukraine–Russia BIT' [2018] 9(3) Journal of International Dispute Settlement 532
protecting foreign investors in disputed territories14. This paper will not address the current state of art on the topic in one separate section but will instead examine and refer to relevant published work throughout the entire analysis. In doing so, it will differentiate between three different classes of claims outlined above.
The structure of this paper is as follows. First, it explains the legal issue and provides some preliminary remarks on the legal framework (Chapter 2). Second, it explores the possibility of having recourse against a de jure sovereign under its investment treaties (Chapter 3). Third, it delves into the territorial scope of application of international investment treaties. It assesses the relationship between general international law and international investment law, paying special attention to the duty of non-recognition, moving treaty frontiers rule, and effective control doctrine. It also argues in favour of an extraterritorial application of investment treaties (Chapter 4). Following this, the paper examines the temporal scope of application of international investment treaties (Chapter 5). Further, it addresses the
Monetary Gold rule and its relevance for the jurisdiction of investment tribunals dealing
with the cases concerning disputed territories (Chapter 6). Finally, it provides some concluding remarks (Chapter 7).
2 SETTING THE SCENE: LEGAL FRAMEWORK
This Chapter will set the scene for the main part of this paper. It will start by explaining the role and function of international investment agreements (Section 2.1). Following this, it will outline the factual background of the Crimea arbitrations. The situation in Crimea is by far the most prominent example of the legal issues with investment protection that might arise as a consequence of illegal annexation (Section 2.2). It will subsequently explain the legal issue – the so-called legal vacuum – in more detail (Section 2.3). Furthermore, it will
14 Richard Happ and Sebastian Wuschka, ‘Horror Vacui: Or Why Investment Treaties Should Apply to
deal with the issue of the illegal annexation of territories under public international law. In the remaining part of this paper, it will be shown that it is exactly the illegal annexation that poses challenges and leads to clashes with international law. It is therefore important to establish when and why annexation of the territory is illegal (Section 2.4). The next Section will explain that rules of occupation applying to annexed territories do not offer adequate and sufficient protection to foreign investors (Section 2.5). Lastly, the paper will address the general presumption of continuity of international treaties (Section 2.6).
2.1 The role of international investment agreements in a nutshell
IIAs form the basis of the contemporary international investment law.15 They are further
divided into two categories: BITs and MITs.16 A BIT is an agreement between two States in
which they undertake to promote and protect investments of investors from one of the Contracting States in the territory of the other Contracting State.17 An MIT is an agreement
on the promotion and protection of investments between more than two Contracting States.18
Most IIAs contain a dispute resolution clause, which offers investors direct access to an effective remedy - arbitration - as opposed to less effective diplomatic protection or adjudication before national courts of a host State. When States insert a dispute resolution clause in their IIAs, they effectively give their consent to international arbitration through a standing offer to arbitrate.19 In case a host State does not fulfil one of its obligations towards a foreign investor, the latter may exercise their right to an effective remedy. All they need to do is to accept the host State's offer to arbitrate by bringing an arbitral claim befor e an
15 Tom Fecak, International Investment Agreements and EU Law (Kluwer Law International 2016) 11 16 Ibid.
17 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd ed, Oxford
University Press 2012) 13
18 Yves Derains and Josefa Sicard-Mirabal, Introduction to Investor-State Arbitration (Kluwer Law
International 2018) 9
19 Christoph Schreuer, Consent to Arbitration. in Peter Muchlinski and others (eds), The Oxford Handbook of
international arbitral tribunal.20 The tribunal can only decide on the merits of the pertinent claim if it has jurisdiction to do so.21 As follows from the principle of competence-competence, it is international arbitral tribunals themselves that can determine their jurisdiction.22
2.2 Crimea arbitrations and other examples
The legal issue of applicability of investment treaties to annexed territories has recently played out against the backdrop of the Crimea crisis. At the time of writing, Ukrainian investors have commenced no less than ten investor-State arbitral proceedings against the Russian Federation under the Russian Federation-Ukraine Bilateral Investment Treaty (hereinafter referred to as Russia-Ukraine BIT) concerning their investments in Crimea. The investment tribunals in the Aeroport Belbek23, Privatbank24, Naftogaz25, Lugzor26,
20 Ibid., p 838 21 Ibid., p 831
22 Yves Derains and Josefa Sicard-Mirabal, Introduction to Investor-State Arbitration (Kluwer Law
International 2018) 41
23 Aeroport Belbek LLC and Mr. Igor Valerievich Kolomoisky v. the Russian Federation, PCA Case No.
2015-07, Decision on Jurisdiction (Not publicly available)
24 PJSC CB PrivatBank and Finance Company Finilon LLC v. the Russian Federation, PCA Case No.
2015-21, Decision on Jurisdiction (Not publicly available)
25 NJSC Naftogaz of Ukraine et al. v. the Russian Federation, PCA Case No. 2017-16, Decision on Jurisdiction
(Not publicly available)
26Lugzor LLC et al. v. the Russian Federation, PCA Case No. 2015-29, Decision on Jurisdiction (Not publicly
available); Curiously, in the Lugzor v. Russia case, an arbitral tribunal allowed Russia to submit one “single,
comprehensive submission on all issues of jurisdiction, admissibility, responsibility and quantum”, after the
state belatedly decided to participate in the proceedings, see also: Lisa Bohmer, 'UNCITRAL Tribunal Rejects Security for Costs Application Prompted by Russia’s Belated Decision to Defend Itself in Under -the-Radar Crimea Case' (IA Reporter, 29 November 2019) <https://www.iareporter.com/articles/uncitral-tribunal- rejects-security-for-costs-application-prompted-by-russias-belated-decision-to-defend-itself-in-under-the-radar-crimea-case/> accessed 6 September 2020
Ukrnafta27, Stabil28, Everest Estate29, and Oschadbank30 cases have rendered their decisions
on jurisdiction. Other investment tribunals are yet to decide on the investment claims filed by Ukrenegro31 and DTEK32. All ten arbitrations were instituted in the aftermath of the Crimea annexation by the Russian Federation.33
27 PJSC Ukrnafta v. the Russian Federation, PCA Case No. 2015-34, Decision on Jurisdiction (Not publicly
available)
28 Stabil LLC et al. v. the Russian Federation, PCA Case No. 2015-35, Decision on Jurisdiction (Not publicly
available)
29 Everest Estate LLC et al. v. the Russian Federation, PCA Case No. 2015-36, Decision on Jurisdiction (Not
publicly available)
30 Oschadbank v. Russian Federation, PCA Case No. 2016-14, Decision on Jurisdiction (Not publicly
available)
31 Jarrod Hepburn, 'Ukrainian Energy Firm Ukrenergo Is Latest to File Crimea-Related Arbitration Claim
against Russia' (IA Reporter, 29 August 2019) <https://www.iareporter.com/articles/ukrainian -energy-firm-ukrenergo-is-latest-to-file-a-crimea-related-arbitration-claim-against-russia/> accessed 6 September 2020
32 DTEK, 'DTEK Initiated Investment Dispute against Russia over the Company’s Assets in Crimea' (DTEK,
11 April 2017) <https://dtek.com/en/media-center/press/dtek-initsiiroval-rassmotrenie-investitsionnogo-spora-s-rossiey-v-otnoshenii-aktivov-gruppy-v-krymu-/> accessed 13 December 2020
33 The beginning of the Crimean crisis dates back to late February 2014, when Russian troops occupied the
peninsula and seized its official buildings. On 16 March 2014, a referendum on the legal status of Crimea was held in Crimea and the city of Sevastopol. The next day, the Supreme Council of Crimea announced the independence of the Republic of Crimea. Following that, the Russian Federation adopted Federal Constitutional Law No. 6-FK3 “On Admitting the Republic of Crimea to the Russian Federation and Forming
New Subjects of the Russian Federation—the Republic of Crimea and the Federal City of Sevastopol” and
the Federal Law “On Ratifying the Agreement between the Russian Federation and the Republic of Crimea
on Admitting to the Russian Federation the Republic of Crimea and Establishing within the Russian Federation New Constituent Entities”. Although the majority of referendum voters supported the reunification
with Russia, the legitimacy of the referendum was never recognised. After all, the referendum was held in the territory which was already partly occupied by the Russian troops. In the following days after the referendum, Russian troops openly seized control of Crimea and forced the Ukrainian military to surrender.
As a response, on 27 March 2014, the United Nations General Assembly passed a resolution titled “On the
Territorial Integrity of Ukraine” affirming that the referendum had no legal validity, and therefore, could not
lead to any change of the legal status of Crimea. The Ukrainian Parliament, in its turn, adopted Law of Ukraine No. 1207-VII, dated 15 April 2014, titled “On Securing the Rights and Freedoms of Citizens and the Legal
Ironically, the decisions of investment tribunals in the Crimea investor-State arbitrations remain confidential, and it is unlikely that they will ever be published. However, the limited information available about them indicates that tribunals have concluded they had jurisdiction over these claims. In particular, they have unprecedently accepted the principle that Russia is responsible under the Russia-Ukraine BIT for the breaches of investment protections on the Crimea Peninsula.34 This was further confirmed by the Swiss Federal Tribunal which has rejected Russia’s request to annul two awards in Ukrnafta and Stabil. 35
Since Russia did not participate in any of the arbitrations, it did not object to the application of the Russia-Ukraine BIT to the territory of Crimea. Arguably, this fact has allowed investment tribunals to avoid dealing with the underlying question of the legality of Crimea annexation.
This work will not address the specifics of Crimea arbitrations. Rather, this paper will refer to the example of Crimea as a starting point for an abstract analysis of the investment protection in the annexation scenario. This study will be useful not only with regard to the situation of Crimea but also in the context of other cases.
To begin with, this research could be relevant to the ongoing conflict in Eastern Ukraine. At the time of writing, no investment claims have been asserted with regard to investments in the territory of Donbas. Nevertheless, Ukrainian investors are reported to have suffered
the aforementioned law, Crimea is a temporarily occupied territory of Ukraine and remains its integral part. Accordingly, even after the annexation, the legal situation in Crimea is still governed by the laws of Ukraine. Therefore, the views of Russia and Ukraine on the legal status of Crimea differ.
34 Luke Eric Peterson, 'In Jurisdiction Ruling, Arbitrators Rule that Russia Is Obliged under BIT to Protect
Ukrainian Investors in Crimea Following Annexation' (IA Reporter, 9 March 2017) <https://www.iareporter.com/articles/in-jurisdiction-ruling-arbitrators-rule-that-russia-is-obliged-under-bit-to-protect-ukrainian-investors-in-crimea-following-annexation/> accessed 6 September 2020
35 Swiss Federal Tribunal Case No. 4A_396/2017 PJSC Ukrnafta v. Russia; Swiss Federal Tribunal Case No.
4A_396/2017 and Stabil LLC and others v. Russia; Sebastian Perry, 'Russia fails to overturn Crimea awards' (Global Arbitration Review, 18 December 2019)<https://globalarbitrationreview.com/article/1212232/russia -fails-to-overturn-crimea-awards> accessed 23 August 2020
losses of their investments in Eastern Ukraine as a result of the crisis there.36 It is reported that Russia has been nationalising investments there since 2014.37
Another scenario for which the findings of this research could be relevant is the current confrontation in Nagorno-Karabakh. Sometimes referred to as Crimea’s doppelganger38, this
territory has been de facto annexed by Armenia, although de jure it remains the autonomous entity of Azerbaijan. Nagorno-Karabakh has been occupied by the armed forces of Armenia since the early 1990s.39 However, this state of affairs has not discouraged foreign investors from making investments in this territory. According to some sources, investors from such States as Russia, Switzerland, Germany, and the United States, among others, have made substantial investments in the region.40 The ongoing armed conflict has had devastating
consequences for many economic sectors in Nagorno-Karabakh and has seriously affected these investments. Legal practitioners and experts believe that this will certainly lead to a series of disputes. However, it is unclear what investment treaties, if any, would apply to the territory. Hence, the analysis based on the Crimea example could shed some light on this issue.
36 Laura Rees-Evans, Litigating the Use of Force: Reflections on the Interaction Between Investor -State
Dispute Settlement and Other Forms of International Dispute Settlement in the Context of the Conflict in Ukraine. in Fach Gómez and others (eds), International Investment Law and the Law of Armed Conflict (Springer International Publishing 2019) 189
37 Global Arbitration Review, 'Another claim over Crimea given go ahead' (Global Arbitration Review, 14
December 2017) <https://globalarbitrationreview.com/another-claim-over-crimea-given-go-ahead> accessed 8 December 2020
38 Thomas De Waal, 'Nagorno-Karabakh: Crimea’s doppelganger' (Open Democracy, 13 June 2014)
<https://www.opendemocracy.net/en/odr/nagorno-karabakh-crimea-doppelganger-azerbaijan-armenia/> accessed 2 January 2021
39 Council on Foreign Relations, 'Nagorno-Karabakh Conflict' (Global Conflict Tracker, 2020)
<https://www.cfr.org/global-conflict-tracker/conflict/nagorno-karabakh-conflict> accessed 3 November 2020
40 Turan, 'Investments in Nagorno-Karabakh Not Guaranteed - Lawyer' (Turan, 7 November 2020)
<https://www.turan.az/ext/news/2020/10/subsc/economics%20news/ru/128388.htm> accessed 27 December 2020
The following Section will explain the issue of the legal vacuum arising out of the annexation of territory.
2.3 Investors in a legal vacuum: the issue explained
The term legal vacuum in the title of this paper refers to the legal situation in which foreign investors with investments in the annexed territories would benefit from none of the protection regimes existing either under the ousted State’s or annexing State’s investment treaties.41
In principle, only the annexing power has effective control over the annexed piece of land. In the example of the Crimea crisis, only the Russian Federation exercises effective control over the Crimean Peninsula. As a result, acts committed on the annexed territory will not be attributed to the ousted State. Conversely, they will be attributable to the annexing State. It is, therefore, improbable for investors to take recourse against the de jure sovereign.42
However, the annexing State, despite its effective control over the annexed territory, cannot be deemed to have succeeded to any treaties the ousted State had entered into with respect to that territory. 43 Accordingly, hypothetical investors in our annexation scenario will have
to rely on the annexing State’s IIAs.
To invoke a dispute resolution clause of a BIT or an MIT, they must establish that they have made an investment in the territory of the host State, that is the annexing State. This would be problematic, if not impossible, as most investments were originally made in the territory
41 This term is used by other authors as well. See, for example, Daniel Costelloe, 'Treaty Succession in
Annexed Territory ' [2016] 65(2) International & Comparative Law Quarterly; Richard Happ and Sebastian Wuschka, ‘Horror Vacui: Or Why Investment Treaties Should Apply to Illegally Annexed Territories’ [2016] 33(3) Kluwer Law International
42 For further discussion on conduct attribution and recourse against the de jure sovereign see Chapter 3. 43 For more on State succession to investment treaties see Section 4.2.
controlled by the de jure sovereign and, therefore, not in the territory of the annexing State.
44 Furthermore, since annexation cannot give a right to a valid legal title to land 45, it is
unlikely that a tribunal would decide that annexed territory has become part of the annexing State and that, therefore, annexing State’s IIAs apply.46
Another issue arises with the temporal scope of investment treaties, as the State that exercises legal control over the territory at the time when investments are made is not the same State that controls this territory at the time the breach with respect to the investment occurs.47
As a consequence, foreign investors will find themselves in a legal vacuum, in which their investment is left unprotected and the annexing State is the party ultimately benefiting from its illegal actions. This paper attempts to find ways to escape this legal vacuum.
The following Section will explain what the meaning of annexation is, and why it is considered illegal under international law.
2.4 The illegal annexation of territory
Under international law, annexation is defined as the acquisition of territory through the threat or use of force.48 It is strictly prohibited by rules of international law.49 In particular,
44 For more on the territorial application of IIAs see again Section 4.2 45 For more on annexation see Section 2.4.
46 For further discussion on the duty of non-recognition consult Section 4.1.
47 Nataliia Tuzheliak, 'Investors at Conflict's Crossroads: An Overview of Available International Courts and
Tribunals in the Crimean Context' [2017] 6(2) UCL Journal of Law and Jurisprudence 25; For more on time limitations see Chapter 5.
48 Rainer Hofmann, ‘Annexation’ [2020] MPEPIL 1376 para 1-3
49 Belen Olmos Giupponi, Exploring the Links Between Nationality Changes and Investment Claims Arising
Out of Armed Conflicts: The Case of Russian Passportization in Crimea. in Fach Gómez and others (eds), International Investment Law and the Law of Armed Conflict (Springer International Publishing 2019) 154
it constitutes a violation of Article 2(4) of the Charter of the United Nations (hereinafter referred to as ‘UN’) which stipulates:
“All Members shall refrain in their international relations from the threat or use of force
against the territorial integrity or political independence of any state, or in any other manner
inconsistent with the Purposes of the United Nations”.50
This rule also follows from a general principle of ex injuria non oritur jus. The prohibition of the use of force under Article 2(4) of the UN Charter is a peremptory norm of international law. 51 It, therefore, comes as no surprise that an illegal annexation does not provide for a
valid title to the territory - it does not produce any legal effects. This was confirmed by the Security Council Resolution 662 relating to the annexation of Kuwait, which had "no legal
validity, and [was] considered null and void”.52 With regard to the Crimea example, given the armed intervention by Russian forces in the territory of Crimea prior to the Crimean referendum, it is undisputed that Russia illegally annexed Crimea. The use of force by the Russian Federation violated the territorial integrity of Ukraine.53
Be that as it may, the annexation of territory carries legal consequences for the responsible State. Moreover, it creates binding and positive obligations for third States. The most prominent of these obligations is a duty of non-recognition. The duty of non-recognition presents a serious threat to the jurisdiction of an investment tribunal and will be further analysed in Chapter 4.1 of this paper.
50 Charter of the United Nations (adopted 26 June 1945, entered into force 24 October 1945) 1 UNTS XVI art
2(4)
51 Sondre Torp Helmersen, 'The Prohibition of the Use of Force as Jus Cogens: Explaining Apparent
Derogations' [2014] 61(2) Netherlands International Law Review 168
52 UNSC Res 662 (9 August 1990) UN Doc S/RES/662
53 Antonello Tancredi, 'The Russian Annexation of the Crimea: Questions Relating to the Use of Force' [2014]
The legal situation within an annexed territory is governed by the law of occupation. The following Section will examine whether it also applies with regard to foreign investments.
2.5 The law of occupation
In principle, annexation is preceded by a prior occupation of a territory. It is for this reason that the rules of belligerent occupation will also govern the legal situation in the annexed territory.54 In particular, the rules of occupation are enshrined in the Fourth Geneva Convention of 194955 and Article 43 of the 1907 Hague Regulations56.
However, the main function of these rules is to restore and maintain public order and civil life in the occupied territory. 57 Since at the time of creation, the rules of occupation did not envisage today’s developments in the area of international investment activities, they do not afford any kind of protection that would be comparable to that under international investment law.58 Accordingly, foreign investors will not be able to rely on the rules of occupation applicable to the pertinent territory to pursue their claims. In other words, the law of occupation is deficient for the purposes of investors’ protection. 59
Another option theoretically available to investors is to seek diplomatic protection. However, today's investment law regime was developed to spare investors from the need to
54 Rainer Hofmann, ‘Annexation’ [2020] MPEPIL 1376 para 28
55 Geneva Convention Relative to the Protection of Civilian Persons in Time of War (adopted 12 August 1949,
entered into force 21 October 1950) 75 UNTS 287 (Fourth Geneva Convention)
56 Hague Convention (IV) Respecting the Laws and Customs of War on Land and Its Annex: Regulations
Concerning the Laws and Customs of War on Land (adopted 18 October 1907, entered into force 26 January 1910) (Hague Regulations)
57 Marco Sassoli, 'Legislation and Maintenance of Public Order and Civil Life by Occupying Powers' [2005]
16(4) European Journal of International Law 661
58 Richard Happ and Sebastian Wuschka, ‘Horror Vacui: Or Why Investment Treaties Should Apply to
Illegally Annexed Territories’ [2016] 33(3) Kluwer Law International pp. 245 - 268
rely on the means of diplomacy. The practical issue with diplomatic protection is the dependency of investors on their respective host state's exercise of discretion.60 A home country may ultimately choose not to espouse a particular claim on behalf of its nationals. Besides, the international law rules governing diplomatic protection do not provide adequate and sufficient means to defend the interests of investors. 61
Therefore, the only available protection for investors would be that under an investment treaty. However, do investment treaties continue to apply to territories that have been annexed? The following Section will deal with exactly this question.
2.6 Presumption of continuity of treaties
A presumption of the continued operation of international treaties implies that international treaties are not terminated by hostilities: even in times of war and armed conflicts, they remain in force.62 As enshrined in Article 3 of the International Law Commission (hereinafter referred to as ILC) Draft Articles on the Effect of Armed Conflict on Treaties:
“[t]he existence of an armed conflict does not ipso facto terminate or suspend the operation
of treaties...as between the parties to the conflict [and] as between the parties to the conflict
and a State that is not”.63
A logical next step is to establish whether this rule also applies to IIAs. In the Annex to the Draft Articles, the ILC has compiled an indicative list of treaties for which a presumption of continuity exists.64 One of the categories listed there is “[t]reaties of friendship,
60 Christoph Schreuer, Investment Protection and International Relations. in August Reinisch and Ursula
Kriebaum (eds), The Law of International Relations: Liber Amicorum Hanspeter Neuhold (Eleven International Publishing 2007) 345
61 Ibid.
62 ILC, ‘Draft Articles on the Effects of Armed Conflicts on Treaties with Commentaries’ (2011) UN Doc
A/66/10
63 Ibid., art 3
commerce and navigation and agreements concerning private rights”.65 Albeit a predecessor of investment treaties, Friendship, Commerce and Navigation treaties (hereinafter referred to as FCN Treaties) differ from the latter in that they do not contain investor-state dispute settlement chapters. This difference is crucial, as the list does not include “treaty mechanisms of peaceful settlement for the disputes arising in the context of
private investments abroad”.66 However, as follows from the ILC’s Commentary on the
Draft Articles on the Effects of Armed Conflicts on Treaties, investment treaties may fall within the category of the “agreements concerning private rights”.67 Arguably, international agreements on the protection of foreign investments remain in force during armed conflicts.
Some IIAs also contain general security clauses, wherein the States reserve their right to take measures for protecting their vital State interests in cases of an emergency including during armed conflicts.68 IIAs, and especially BITs, contain several types of clauses dealing
with violent situations. These treaty provisions safeguard the interests of investors even in situations of armed conflict. The most common provision of this kind that may be found in many investment treaties is a clause providing for full protection and security. Moreover, some IIAs contain clauses that specifically deal with armed conflicts called “war clauses”.69 These clauses ensure non-discrimination in the treatment of losses incurred through armed conflicts and similar situations and sometimes go even further by promising compensation for losses incurred provided certain conditions are met. 70
65 Ibid. 66 Ibid., p 129 67 Ibid.
68 Christoph Schreuer, The Protection of Investments in Armed Conflicts. in Freya Baetens (ed), Investment
Law within International Law: Integrationist Perspectives (Cambridge University Press 2013) 3-4
69 Suzanne Spears and Maria Fogdestam Agius, Protection of Investments in War-Torn States: A Practitioner’s
Perspective on War Clauses in Bilateral Investment Treaties. in Fach Gómez and others (eds), International Investment Law and the Law of Armed Conflict (Springer International Publishing 2019) 286 -298
The next Chapter will address the possibility of taking a recourse against the ousted State under its investment treaties.
3 RECOURSE AGAINST A DE JURE SOVEREIGN
The first category of investment claims discussed in this contribution is claims by third-country investors against the ousted State under the investment treaty concluded by the third State and the ousted State. Albeit unlikely, one should also consider a hypothetical scenario in which foreign investors assert claims against the de jure sovereign. This Chapter will do exactly that.
The international community, including the United Nations, will not recognise the annexation of territory and will therefore continue to see the annexed territory as part of the ousted State.71 Whereas the ousted State will not be responsible for active violations of investors’ rights committed on the annexed territory, it will remain responsible under its investment treaties for any violations of an obligation to provide full protection and security.72
The obligation to provide full protection and security of foreign investments is contained in most IIAs. For instance, Article 2(2) of the Russia-Ukraine BIT provides:
71 Yaroslav Kryvoi and Maria Tsarova, 'Protecting Foreign Investors in Crimea: Is Investment Arbitration an
Option?' (CIS Arbitration Forum, 29 July 2014) <http://www.cisarbitration.com/2014/07/29/protecting-foreign-investors-in-crimea-is-investment-arbitration-an-option/> accessed 23 November 2020
“[e]ach Contracting Party shall guarantee, in conformity with its legislation, the complete and unconditional legal protection of investments of investors of the other Contracting
Party”.73
This is a general standard of protection, under which, the host State has an obligation to take all necessary measures to protect foreign investments on its territory from any violent acts.74
In principle, investment tribunals agree that the standard of full protection and security refers to physical security and to the host State’s obligation to protect foreign investments against adverse actions of State organs and private parties.75 However, the duty to provide protection and security is not absolute in the sense that it does not create strict liability for a host State. In Wena v. Egypt, the tribunal accepted that:
“a host state’s promise to accord foreign investment such protection is not an absolute obligation which guarantees that no damages will be suffered, in the sense that any violation
thereof creates automatically a ‘strict liability’ on behalf of the host State”.76
Consequently, the claim for full protection and security of foreign investments requires the determination that the adverse action is legally attributable to the State in question.77 In other words, only conduct attributable to the State can give rise to state responsibility.
73 Agreement between the Government of the Russian Federation and the Cabinet of Ministers of the Ukrain e
on the Encouragement and Mutual Protection of Investments (adopted 27 November 1998, entered into force 27 January 2000) (‘Russia-Ukraine BIT’) art 2(2)
74 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd ed, Oxford
University Press 2012) 161-162
75 BG Group Plc. v. The Republic of Argentina, UNCITRAL, Final Award (24 December 2007), para 324;
Sempra Energy International v. The Argentine Republic, ICSID Case No. ARB/02/16, Award (28 September 2007), para 323; Eastern Sugar B.V. (Netherlands) v. The Czech Republic, SCC Case No. 088/2004, Partial Award (27 March 2007), para 203
76 Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award (8 December 2000), para
84
77 Yaroslav Kryvoi and Maria Tsarova, 'Protecting Foreign Investors in Crimea: Is Investment Arbitration an
Option?' (CIS Arbitration Forum, 29 July 2014) <http://www.cisarbitration.com/2014/07/29/protecting-foreign-investors-in-crimea-is-investment-arbitration-an-option/> accessed 23 November 2020
This conclusion also follows from Article 2 ARSIWA.78 The attributability of the State conduct is further regulated in Articles 4 to 11.79 These Articles prescribe several ways for the conduct attribution. For the conduct that constitutes a breach of investment law to be attributed to the ousted State it must be the conduct of (i) its State organ80; or (ii) the conduct
of a person or entity empowered by the ousted State to exercise elements of governmental authority81; or (iii) an organ that is placed at the disposal of the annexing State by the de
jure sovereign82; or (iv) a person or group of persons acting on the instructions of, or under the direction or control of that State83. Finally, State conduct could be attributed to the de jure sovereign if it acknowledged and adopted the conduct as its own84.
Following the reasoning of Katharina Wende in her contribution, no violation of investment treaties committed on the annexed territory after its annexation can be attributed to the de
jure sovereign.85 She then provides a convincing and sound argument as to why this will not be the case. First, it is unlikely that the ousted State has control over any organs, entities, or persons acting in the annexed territory given that only the annexing State has effective control over the area in question.86 It is also improbable that the ousted State would place organs at the disposal of the annexing State. Finally, it is highly unlikely that the de jure sovereign would acknowledge and adopt any conduct constituting a breach of an IIAs as its own.
78 ILC, ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts’ (November 2001), UN
Doc A/56/10, Supplement No. 10 (ARSIWA) art 2
79 Ibid., art 4-11 80 Ibid., art 4 81 Ibid., art 5 82 Ibid., art 6 83 Ibid., art 8 84 Ibid., art 11
85 Katharina Wende, 'The Application of Bilateral Investment Treaties in Annexed Territories: Whose BITs
Are Applicable in Crimea after Its Annexation' [2016] 29(133) Hague Yearbook of International Law 138-139
Yaroslav Kryvoi and Maria Tsarova agree that the requirement of attribution cannot be
fulfilled if the annexed territory is effectively controlled by the annexing power.87 It is only logical that when a de jure sovereign does not consider a new government legitimate, the actions of this government cannot be attributed to it. For instance, since Ukraine regards the Crimean government as illegitimate and has no effective control over it, Ukraine cannot be held responsible for any alleged expropriation or other breaches of investment law committed in Crimea following its annexation. It goes without saying, however, that a de
jure sovereign will be responsible for any breaches of investment protections committed at
the annexed territory prior to its annexation, as these breaches will be attributed to it.
Furthermore, as argued by Yaroslav Kryvoi and Maria Tsarova, a de jure sovereign could also invoke a force majeure defence.88 The force majeure defence is enshrined in Article 23
of the ILC Draft Articles on State Responsibility:
“[t]he wrongfulness of an act of a State not in conformity with an international obligation of that State is precluded if the act is due to force majeure, that is the occurrence of an irresistible force or of an unforeseen event, beyond the control of the State, making it
materially impossible in the circumstances to perform the obligation.”(emphasis added).89
Yaroslav Kryvoi and Maria Tsarova suggest that annexation can, indeed, amount to a force majeure making it impossible for the de jure sovereign to perform its obligations.90 This is
due to the fact that states cannot always foresee or control the annexation of their sovereign
87 Yaroslav Kryvoi and Maria Tsarova, 'Protecting Foreign Investors in Crimea: Is Investment Arbitration an
Option?' (CIS Arbitration Forum, 29 July 2014) <http://www.cisarbitration.com/2014/07/29/protecting-foreign-investors-in-crimea-is-investment-arbitration-an-option/> accessed 23 November 2020
88 Ibid.
89 ILC, ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts’ (November 2001), UN
Doc A/56/10, Supplement No. 10 (ARSIWA) art 23
90 Yaroslav Kryvoi and Maria Tsarova, 'Protecting Foreign Investors in Crimea: Is Investment Arbitration an
Option?' (CIS Arbitration Forum, 29 July 2014) <http://www.cisarbitration.com/2014/07/29/protecting-foreign-investors-in-crimea-is-investment-arbitration-an-option/> accessed 23 November 2020
territory. In the Crimea case, for example, Ukraine could neither foresee (arguably) nor control the annexation of Crimea.
Therefore, although a violation of an obligation to provide full protection and security could potentially form a basis for a claim against the de jure sovereign under its investment treaties, such a claim is not likely to succeed given the factual context of the annexation scenario. Interestingly, no claims have so far been asserted against the de jure sovereign, Ukraine, in the Crimea arbitrations. Since all of them have been started by Ukrainian investors this comes as no surprise.
4 THE TERRITORIAL SCOPE OF INVESTMENT TREATIES
To enforce their right to investment protection, foreign investors in annexed territories would need to bring a claim before an investment arbitral tribunal. However, claimants relying on investment treaties of the annexing State will inevitably be faced with two jurisdictional hurdles, namely the territorial and the temporal scopes of application of investment treaties. This Chapter will address the first procedural hurdle, namely, the territorial scope of application of IIAs, whereas Chapter 5 will focus on the temporal scope.
This Chapter will start by discussing the relationship between the obligation of non-recognition and the territorial scope of IIAs (Section 4.1). Following this, it will explain a general rule of territorial application of international treaties and by assessing the applicability and effects of the moving treaty frontiers rule (Section 4.2). Lastly, it will analyse the possibility of extraterritorial application of investment treaties to annexed territories (Section 4.3).
4.1 Obligation of non-recognition
Most authors agree that the obligation of non-recognition of an illegal territorial acquisition may present a hurdle to the jurisdiction of an investment tribunal. 91 The obligation of non-recognition is enshrined in Article 41(2) of the ILC Draft Articles on State Responsibility which stipulates:
“[n]o State shall recognise as lawful a situation created by a serious breach [..] [of an
obligation arising under a peremptory norm of general international law], nor render aid
or assistance in maintaining such situation”. 92
This obligation derives largely from the well-established general principle of international law ex injuria jus non oritur, i.e., legal rights cannot arise from an illegal act.93 Moreover, the obligation of non-recognition of an unlawful situation is an erga omnes obligation of customary international law meaning that it is owed towards all States. 94 According to the ILC, the obligation of non-recognition does not only refer to formal recognition, but also to actions that imply such recognition.95
The obligation of non-recognition is well-accepted within the international legal community. Notably, the UN GA emphasised the duty of non-recognition in its Friendly
91 See, for example, Sebastian Wuschka, Investment tribunals adjudicating claims relating to occupied
territories – curse or blessing? in Antoine Duval and Eva Kassoti (eds), The Legality of Economic Activities in Occupied Territories: International, EU Law and Business and Human Rights Perspectives (Routledge 2020) 238
92 ILC, ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts’ (November 2001), UN
Doc A/56/10, Supplement No. 10 (ARSIWA) art 41 (2)
93 Martin Dawidowicz, The Obligation of Non-Recognition of an Unlawful Situation. in James Crawford and
others (eds), The Law of International Responsibility (Oxford University Press 2010) 678
94 Stefan Talmon, The Duty Not to 'Recognize as Lawful' a Situation Created by the Illegal Use of Force or
Other Serious Breaches of a Jus Cogens Obligation: An Obligation without Real Substance?. in Christian Tomuschat and Jean Marc Thouvenin (eds), The Fundamental Rules of the International Legal Order (Martinus Nijhoff Publishers 2006) 100
Relations Declaration96 as well as in its Definition of Aggression97. With regard to the situation in Crimea, in its Resolution 68/262, the UN GA called upon:
“all States, international organisations and specialised agencies not to recognise any
alteration of the status of the Autonomous Republic of Crimea and the city of Sevastopol […] and to refrain from any action or dealing that might be interpreted as recognising any such altered status”.98
Non-recognition means that the intended change of the legal status of an annexed territory must be treated as non-existing.99 According to Michael Bothe, for the Crimean scenario, this would mean that, despite Russia's de facto control over Crimea, the Crimean territory remains de jure Ukrainian.100
The obligation of non-recognition implies that States have a duty not to enter into treaty relations with an illegal regime when that regime acts on behalf of the annexed territory.101
With regard to already concluded international treaties, States are obliged to abstain from applying the agreements that will have implications for the illegally annexed territory.102
Theoretically, this also holds true for investment treaties. The obligation of non-recognition can therefore affect the applicability of IIAs to the annexed territories.
The obligation of non-recognition poses challenges in respect of the claims brought by investors of the ousted State or investors of the third State against the annexing State under
96 UNGA Res 2734 (XXV) (16 December 1970) UN Doc A/RES/2734 97 UNGA Res 3314 (XXIX) (14 December 1974) UN Doc A/RES/3314 98 UNGA Res 68/262 (27 March 2014) UN Doc A/RES/68/262 para 6
99 Michael Bothe, 'The Current Status of Crimea: Russian Territory, Occupied Territory or What' [2014]
53(99) Military Law and the Law of War Review 101
100 Ibid.
101 Legal Consequences for States of the Continued Presence of South Africa in Namibia (South West Africa)
notwithstanding Security Council Resolution 276 [Advisory Opinion] [1971] ICJ Rep 1971 (Namibia
Advisory Opinion) para 122
its respective investment treaties. This is because, in order for these claims to succeed, the annexing State’s IIAs have to be applied to the annexed territory in question. On the other hand, this is not problematic with respect to the claims brought by investors of a third State under its investment treaties with the ousted State. The ousted State maintains de jure sovereignty over the annexed territory, and, therefore, the application of its investment treaties to this territory does not have any implications for the duty of non-recognition.
In its Namibia Advisory Opinion, the International Court of Justice (hereinafter referred to as ICJ) has established a general exception to this rule: international agreements may continue to apply if their non-performance is detrimental for the population of the annexed territory.103 The case concerned the continued presence of the South African authorities in
Namibia. South Africa proceeded to administer the territory even after its mandate was terminated. The Security Council requested the Court to give an advisory opinion on the matter. In its Advisory Opinion, the ICJ found that the continued presence of South Africa in Namibia was illegal.104 In addition, it decided that State Members of the United Nations had an obligation not to recognise South Africa’s administration in Namibia and its acts on behalf of or concerning Namibia.105 Nonetheless, ICJ concluded that “the non-recognition
of South Africa's administration of the territory should not result in depriving the people of Namibia of any advantages derived from international cooperation”.106 This has become known as the Namibia exception.
With regard to multilateral conventions, the Court established that treaties may be applied if their non-performance would have adverse consequences for the population of the
103 Legal Consequences for States of the Continued Presence of South Africa in Namibia (South West Africa)
notwithstanding Security Council Resolution 276 [Advisory Opinion] [1971] ICJ Rep 1971 (Namibia
Advisory Opinion) para 125
104 Ibid. 105 Ibid. 106 Ibid.
annexed territory.107 The question arises whether this principle also covers the application of investment treaties. As a general rule, the Namibia exception applies to the “inhabitants
of the territory”. The term refers to individuals living in the annexed territory as well as the
population as a whole.108 On the first examination, therefore, it may appear that the Namibia exception does not cover the interests of foreign investors holding investments in the annexed territory. However, as rightly pointed out by Yaël Ronen, the exception can be interpreted more broadly to also include the interests of any individual affected by the annexation even if that person is not an inhabitant of the annexed territory.109
This was confirmed by the European Court of Human Rights (hereinafter referred to as ECtHR) in its jurisprudence concerning the illegal regime in Northern Cyprus. For example, the Demopoulos and Others v. Turkey case was started by the Greek-Cypriot applicants claiming a violation of their property rights due to the continued occupation of the Northern part of Cyprus by Turkey.110 In this case, the ECtHR concluded that a broad interpretation of the term “inhabitants of the territory” would be crucial to “avoid a vacuum which
operates to the detriment of those who [..] living outside, may claim to have been victims of infringements of their rights”.111 Several authors have argued that it is possible to interpret the Namibia exception to provide protection to investors having invested in the annexed or occupied territory.112
107 Legal Consequences for States of the Continued Presence of South Africa in Namibia (South West Africa)
notwithstanding Security Council Resolution 276 [Advisory Opinion] [1971] ICJ Rep 1971 (Namibia
Advisory Opinion), para 122
108 Yaël Ronen, Transition from Illegal Regimes under International Law (Cambridge University Press 2011)
83
109 Ibid.
110 Demopoulos and Others v Turkey (2010) ECHR, App. No. 46113/99 111 Ibid., para 96
112 See, for example, Olga Kuchmiienko, How does the Change in Effective Control over Territory Influence
the Application of the Ukraine-Russia and Other BITS? To BIT or NOT TO BIT?. in Klausegger and others (eds), Austrian Yearbook on International Arbitration 2020 (Manz’sche Verlags- und Universitätsbuchhandlung 2020) 549; Katharina Wende, 'The Application of Bilateral Investment Treaties in
As mentioned, the rationale of the obligation of non-recognition is the idea that no State should be able to create an advantageous situation out of its wrong.113 This principle aims at sanctioning States that engage in illegal conduct.114 However, as has been argued by
Richard Happ and Sebastian Wuschka, non-application of treaties based on the principle of
non-recognition could, in fact, allow the annexing State to benefit from its illegal conduct. If treaties are not applicable, the annexing State is not bound by treaty obligations as opposed to the situation wherein the State had lawfully acquired the territory and the investment treaties were to apply. Richard Happ and Sebastian Wuschka are of the opinion that:
“ [s]uch a situation would be contrary to the object and purpose of the sanction and frustrate
the application of the ex injuria jus non oritur principle.”115
Applying this to our annexation scenario, one may conclude that allowing the annexing State to benefit from its unlawful actions and leaving foreign investors unprotected contravenes the very purpose of the obligation of non-recognition. The obligation of non-recognition should not preclude the application of investment treaties to annexed territories.
Furthermore, even when an investment treaty applies prima facie, to establish its jurisdiction, an investment tribunal would have to recognise the effects of the illegal annexation of territory. The issue is therefore not so much with the applicability of the treaty, but with the obligation of arbitrators to respect international law in their judgments. Nevertheless, one could argue that the obligation not to recognise an illegal annexation is not binding on investment tribunals. After all, the obligation of non-recognition rests
Annexed Territories: Whose BITs Are Applicable in Crimea after Its Annexation' [2016] 29(133) Hague Yearbook of International Law 142-146
113 Richard Happ and Sebastian Wuschka, ‘Horror Vacui: Or Why Investment Treaties Should Apply to
Illegally Annexed Territories’ [2016] 33(3) Kluwer Law International pp. 262-263
114 Ibid. 115 Ibid.
