I. Introduction
Nothing man deliberately does disorders economic relations more profusely than armed conflict. Whether the conflict is internal or international, it upsets the assumptions and foundations of all legally ordered economic activities—with the exception perhaps of deals designed for the prosecution of the war itself, if at all.
Arbitral claims arising out of warfare could proceed into three broad categories: state-to-state; investor-state; or purely commercial claims. Tribunals faced with anyone of these categories of claims would have to resolve any number of complex issues ranging from their own jurisdiction to arbitrability and enforceability of their awards. My Article will focus on only two of the many issues that state-to-state and investor-state tribunals face (which leaves the great majority of commercial arbitration tribunals out for others): (1) the ascertainment of the rule of decision; and (2) the determination of facts. I will use one case study for each: the Eritrea-Ethiopia Claims Commission's awards of (2009)Footnote 1 for state-to-state; and the Strabag v. Libya (ICSID, 2020)Footnote 2 case for investor-state claims.
II. War Related State-to-State Arbitration
Post-conflict state-to-state arbitrational tribunals are almost invariably creations of peace treaties of one kind or the other. I will focus on the Eritrea-Ethiopia Claims Commission (the Commission) established by the Algiers Agreement of December 2001.Footnote 3
A. The Rule of Decision
1. The Source and the Rule
Article 5(1) of the Algiers Agreement provides:
Consistent with the Framework Agreement, in which the parties commit themselves to addressing the negative socio-economic impact of the crisis on the civilian population, including the impact on those persons who have been deported, a neutral Claims Commission shall be established. The mandate of the Commission is to decide through binding arbitration all claims for loss, damage or injury by one Government against the other, and by nationals (including both natural and juridical persons) of one party against the Government of the other party or entities owned or controlled by the other party that are (a) related to the conflict that was the subject of the Framework Agreement, the Modalities for its Implementation and the Cessation of Hostilities Agreement, and (b) result from violations of international humanitarian law, including the 1949 Geneva Conventions, or other violations of international law. The Commission shall not hear claims arising from the cost of military operations, preparing for military operations, or the use of force, except to the extent that such claims involve violations of international humanitarian law.
So, the rule of decision was international humanitarian law including the four Geneva conventions. Interestingly, however, Eritrea was not a party to the Geneva Conventions. One of the historic contributions of this Tribunal was its ruling, perhaps for the first time, that the Geneva Conventions are binding on all states as a matter of customary international law. Footnote 4
When such a broad area of law is selected by the parties as the governing law, how are the parameters ascertained and applied.
2. Ascertainment of the Law and Application
i. State to State
In this case, the Tribunal issued seventeen different awards.Footnote 5 In each one of these cases, the Tribunal relied on the parties’ submissions. It did not hire its own experts. It did not consider the law a matter of fact that had to be proven as, for example, an English court would want foreign law to be proven. As such, international humanitarian law was the rule of decision and its violation led to the finding of liability. A good example is the Commissions decision in the civilian victims of the war: It held:
28. In the Commission's view, customary international humanitarian law was the most significant legal component in the Parties’ relationship when many of these events took place. In its Partial Awards on Prisoners of War and the Central Front, the Commission held that the law applicable to those claims before August 14, 2000 (when Eritrea acceded to the four Geneva Conventions of 194912) was customary international humanitarian law. The Commission held further that those Conventions have largely become expressions of customary international humanitarian law, and consequently that the law applicable to those claims was customary international humanitarian law as exemplified by the relevant parts of the four Geneva Conventions. Those holdings apply as well here and, indeed, to all the claims before the Commission. Hence, Ethiopia's treatment of Eritrean nationals was subject to the relevant principles articulated in Geneva Convention IV in addition to other potentially relevant norms.
29. Aspects of Protocol I are also relevant. While portions of Protocol I reflect progressive development of the law, throughout these proceedings, both Parties treated core Protocol I provisions governing the protection of civilians as reflecting binding customary rules. The Commission agrees, and recalls its earlier holding that, during the armed conflict between the Parties, most of the provisions of Protocol I expressed customary international humanitarian law.
30. The Commission views Article 75 of Protocol I as reflecting particularly important customary principles. Article 75 articulates fundamental guarantees applicable to all “persons who are in the power of a Party to the conflict who do not benefit from more favorable treatment under the Conventions or under this Protocol.” It thus applies even to a Party's treatment of its own nationals. These guarantees distill basic human rights most important in wartime. Given their fundamental humanitarian nature and their correspondence with generally accepted human rights principles, the Commission views these rules as part of customary international humanitarian law. Footnote 6
Future arbitral tribunals adjudicating war-related civil claims must take these finds as excellent guidance although they may not be strictly binding. We can talk more about them, but I will move on to investor-state arbitration.
ii. Investor-State
In investor-state arbitration the rule of decision could naturally emanate from an investment treaty, an investment agreement or just any contractual instrument that binds the state and the investor or indeed a combination of all of them. Each could individually be a source of great uncertainty, but the uncertainty is compounded when contractual obligations are elevated to state responsibility through what is called the umbrella clause. Strabag SE v. Libya offers an excellent example of this in a war-related arbitration.
Overall, Strabag SE v. Libya (2020) is one of few cases that based a substantial portion of the finding of liability and award of damages on the umbrella clause. The Tribunal first found jurisdiction to adjudicate the purely contractual claims of the contractors by interpreting the generic umbrella clause under Article 8(1) of the applicable Libya-Austria bilateral investment treaty.Footnote 7 It then considered each and every breach of contract claim under the umbrella clause by referring back to its jurisdictional decision without any serious analysis of its substantive content. The only reference in the substantive merits part about the application of the umbrella clause for the substantive breach of contract claims was this: “Claimant advances substantial claims on the basis of Article 8(1) of the Treaty, the umbrella clause. Interpretation and application of this provision are discussed supra, in connection with Respondent's objections to the Tribunal's jurisdiction.”Footnote 8
The next time Article 8(1) appears in the award is the finding of liability for a very specific claim of unpaid certificate of work: “On this basis, FTI assesses and the Tribunal accepts that Al Hani is entitled to receive an additional € I,092,078 on its payment certificates claim pursuant to Article 8(1) of the Treaty.”Footnote 9
Likewise, the next time Article 8(1) appears is also in connection with a finding of liability and allocation of damages: “Accordingly, on the basis of Article 8(1) of the Treaty, the Tribunal awards 90% of the amount claimed with respect Payment Certificate No. 3, € 1.04 million.”Footnote 10
There was a tremendous analytical gap between the finding of jurisdiction to adjudicate umbrella clause claims and the finding of liability under the umbrella clause. Technically, the finding of jurisdiction under the umbrella clause permits the Tribunal to assess whether the state failed to honor specific international commitments, which in this case might have been expressed in construction contracts.
While the Tribunal has assessed the various payment certificates on the facts, it seems to have skipped an essential analytical step of whether or not they were considered breaches of obligation under Libyan law, and if so, whether each unpaid payment certificate represented a dishonored international obligation under the umbrella clause.
The Tribunal took a shortcut by relying on its jurisdictional analysis of the umbrella clause for its finding of liability and assessment of damages. Its use of the umbrella clause was indeed more generous than would be expected from a post-backlash contemporary tribunal. The Tribunal, at least the majority, gave a noticeably sympathetic consideration to the investor's wartime disruptions and losses, perhaps subscribing to the view that the state is more blameworthy for its predicaments and is in a better position to absorb wartime or conflict produced losses. For that, it used the umbrella clause highly effectively. This is a great example of the temptation to push wartime losses toward the state implicitly assigning the blame for having caused or failing to prevent the warfare in the first place. Something to discuss.
B. Arbitral Fact Finding in War-Related Arbitral Cases
Carl von Clausewitz: “The great uncertainty of all data in war is a peculiar difficulty, because all action must, to a certain extent, be planned in a mere twilight, which in addition not infrequently—like the effect of a fog or moonshine—gives to things exaggerated dimensions and unnatural appearance.”Footnote 11
Being the proverbial first causality of war, facts have to be determined as in all contentious legal matters where the parties disagree. Facts do not, however, get the same level of attention as law in international decision making and the reason is very well explained by Professor John Crook in his 2009 book chapter titled “Fact- Finding in the Fog: Determining the Facts of Upheavals and Wars in Inter- State Disputes.” He says that: “Adjudicators in inter-state cases also often show a marked preference for basing outcome on legal grounds and undisputed facts whenever possible. The life experiences of the eminent legal personalities selected to decide such cases, and the distinguished scholars who appear as advocates before them, often have centered on the study of law. Their professional forte is not likely to be vigorous and sustained (and often tedious and time consuming) inquiry into thousands of pages of documentary annexes.”Footnote 12
The problem is more acute in situations of war: “For example, given the elimination of compulsory military service in many countries, modern international advocates, like those before whom they appear, are not likely to have had practical experience with military affairs. Thus, both the advocate and the decision- makers in the cases involving such matters may lack relevant factual context for assessing factual disputes. They have no personal store of experience to test what may be wholly inconsistent portrayals of complex events advanced by the parties.”Footnote 13
The Tribunal in the Eritrea Ethiopia Claims Commission case acknowledged this and required a heightened evidentiary standard in the following terms:
35. As in the Parties’ prior cases, the Commission has required proof of liability by clear and convincing evidence. Thus, conflicting, yet credible, evidence is likely to result in fewer findings of unlawful acts than either Party might expect. The Commission has again taken its fundamental responsibility to be to concentrate on persistent and widespread patterns of misconduct, rather than individual acts.Footnote 14
The Strabag SE v. Libya (2020) Tribunal had one of the most difficult tasks of determining facts in the fog of war. As a matter of fact, it appears that the co-arbitrators might have selected Professor John Crook as chair because of his nine years of experience on the Eritrea-Ethiopia Claims Tribunal adjudicating claims for wartime losses. In this case, the Tribunal framed the legal issues in such a way that the finding of liability depended on highly specific factual findings. In each particular instance, the Tribunal had to find who committed what distraction when and why. Because there were numerous players including NATO forces, the Tribunal had to find in each case whether the Libyan forces caused the damage to the exclusion of others and whether that damage was not justifiable by military necessity.Footnote 15
In that sense, it took a creative solution to the very difficult task of determining facts under these circumstances. For example, it adopted a percentage allocation methodology for some of the claims. Consider the following:
The Tribunal is therefore again left to make its best assessment of how much damage is attributable to actions by Libya's armed forces, in particular, soldiers of the 32nd Reinforced Brigade, in conditions not potentially implicating military necessity. In doing so, it is again guided by the principles applied in the previous claim for equipment lost/destroyed in 2011, recognizing that some compensation is due, but that the evidence does not allow of precise determination. Based on the Sadaoui Report, especially the detailed chronology of events from page 11 onwards, the Tribunal determines that approximately one-third of the damage is attributable to Libyan State forces for purposes of liability under Article 5(2)(b) with a reasonable degree of certainty. Consequently, the damages for which Libya is liable amount to €858,000, approximately one-third of the €2,573, 186 claimed.Footnote 16
One important matter of fact caused a two-to-one split of the members of the Tribunal, and it concerns a potentially significant setoff opportunity for the respondent. Interestingly, the split between the members of the Tribunal was caused not by matters of legal principle but primarily by matters of appreciation of fact. The Tribunal awarded a significant amount of money for the claimant's losses sustained during the revolution, however, the claimant, as a construction company, had taken tens of millions of dollars as advance payment against performance guarantees. These guarantees had their own expiration dates. The parties disputed whether the bank guarantees expired or not. Two members of the Tribunal considered this a matter outside of this arbitration and did not want to get to the bottom of it for purposes of setoff. The dissenting arbitrator, however, thought that the evidence showed that these guarantees may not be recoverable by the respondent and as such the respondent should have been permitted to setoff against some of the award of damages. “Respondent contends, however, that Al Hani still holds EUR 98,128,159 in unearned advance payments under the Tajura, TIAR, TIAR-NE, and Garaboulli contracts, 17 and that Al Hani has an obligation to repay those unearned amounts since they pertain to work that was never performed by Al Hani under the contracts.”Footnote 17
The dissent imparts a very serious indictment of the majority for failing to get to the bottom of the issue of advance paymentFootnote 18 and states in strong terms:
41. While Respondent and its expert provide detailed figures for advance payments that they consider not yet to have been earned, Claimant states vaguely, with little supporting documentation, that the full advance payments had been fully used up to finance “significant costs that Strabag incurred upfront at the outset of the projects (for example, in recruiting and mobilising personnel, constructing site facilities, purchasing equipment and machinery, and engaging sub-contractors).” By its own admission, Claimant used unearned portions of the advance payments to buy equipment and supply the joint venture with cash.
42. The Tribunal nonetheless awards Claimant compensation for some of the aforementioned up front costs, including for lost or damaged equipment and damages caused by delay. Without proper consideration of the issue of advance payments, it may well turn out that the Award compensates Claimant for equipment and other costs that, by Claimant's own admission, have already been covered using unearned portions of the advance payments, i.e., monies from Respondent.Footnote 19
Not satisfied with this, it goes on to state:
A task partially completed may prove in practice to be more problematic than a task not initiated at all. The majority's decision to summarily deny Respondent's requested setoff fails to recognize that the issues of the advance payments, the bank guarantees, and Claimant's claims for damages are intertwined and cannot be resolved separately. This fragmentation is not conducive to “good order and fundamental fairness,” to which the majority and indeed the entire Tribunal aspired.Footnote 20
It is clear that the majority of this Tribunal viewed the facts in the light most favorable to the claimant and showed no sympathy for the respondent's war-caused predicaments. Can arbitral tribunals ever get to the bottom of the factual predicates of war-time disputes to make a reasonable allocation of liability? Or is that even the purpose of setting them up in the first place.
III. Conclusion
In his dissenting opinion in Mitsubishi v. Soler,Footnote 21 Justice Stevens called arbitration a close approximate of the correct result, which may be acceptable to businessmen who are eager to move onto the next deal, but matters of public importance (such as anti-trust laws) must not be arbitrable.
The majority in that case recognized the problem but seems to believe that the benefits outweigh the imperfections. Likewise, in some post-conflict situations, even when the parties are not bound by preexisting commitment (which they cannot get out of), a submission agreement of the types we considered above (Eritrea-Ethiopia case) may be the best available alternative as in war, the alternative is often more war.
