The Political and Legal Ambiguities of the Multilateral Security Support Mission Authorized for Haiti

The Political and Legal Ambiguities of the Multilateral Security Support Mission Authorized for Haiti

Moise Jean*

Introduction

Almost a year after the Haitian government requested an international force to deal with gang violence, the United Nations Security Council adopted a resolution under Chapter VII of the United Nations Charter authorizing the formation and deployment of a Multinational Security Support (MSS) mission. This resolution came at a time when public opinion was beginning to question the inaction of the international community, and even its responsibility to protect, in situations such as this, where the state is incapable of ensuring the protection of its own population.

The resolution contains some particularly encouraging aspects: it requires the Mission to carry out its mandate in strict compliance with international law; it commits the Mission to guarantee respect for fundamental human rights, to protect children, and to prevent sexual and gender-based violence and exploitation; and it provides for the establishment of a complaint mechanism. In the event of allegations of misconduct, the Mission is required to conduct investigations and, if necessary, determine who is responsible. The resolution also requests member states participating in the MSS to adopt appropriate wastewater management and other environmental controls to guard against the introduction and spread of water-borne diseases, in accordance with the “World Health Organization’s 2001 report on water quality guidelines.”

These aspects are encouraging because international military interventions are at a high risk of violating international law, whether it be the risk of misuse of the mandate or the risk of human rights violations. In Haiti, U.N. peacekeepers were accused of human rights violations, sexual exploitation, and being responsible for the cholera epidemic that claimed thousands of victims. The formal inclusion of these provisions in the resolution is therefore a commendable initiative: it should help to dissuade the states involved and could contribute to the conduct of operations on a basis closer to the rule of law.

Beyond these positive prospects, however, the resolution raises several fundamental issues by authorizing the creation and deployment of an international military force whose legal nature is ambiguous. As we shall see, this ambiguity may have a negative impact on the smooth running and effectiveness of the authorized operation and may generate difficulties in the event of responsibility for any violations of international obligations.

I. A New Kind of Mission

The Mission to be deployed in Haiti is neither a collective security mission nor a U.N. peacekeeping mission. Although it is based on Chapter VII of the Charter, the resolution does not mention the precise article that is being invoked for authorization of the Mission. The authorized intervention, like many others before it, will not be carried out under the authority of the Security Council. It is therefore not a collective security mission. Similarly, it cannot be described as a peacekeeping mission, since the link between these types of operations and the United Nations is clear from their names––which is not the case for the Mission in question. The international force to be deployed in Haiti is therefore akin to what the doctrine calls an “authorized operation,” as was the case in Korea in 1950, Iraq in 1991, and Libya in 2011. The only difference is that, in those cases, the operation was imposed. Here, it was requested.

There are, however, distinctive features of the Mission that set it apart from authorized operations.  First, there is the question of its mandate. According to the resolution, the Mission is to “provid[e] operational support to the Haitian National Police, including building its capacity through the planning and conduct of joint security support operations.” It must also “provid[e] support[] to the Haitian National Police[] for the provision of security for critical infrastructure sites and transit locations.” In other words, it is not a direct intervention force, with a clear mission to restore security in Haiti. Rather, its mission would be to support the Haitian police in their efforts to combat crime and insecurity. The multinational force would carry out its operations in complementarity with, or even under the leadership of, the police.

This is a new feature in the history of operations authorized by the Security Council. In principle, operations authorized under Chapter VII of the Charter are intended to intervene directly to pacify a situation threatening international peace and security. They do not have to act as a complement to a national force. They are operations that are justified by a peace-threatening situation, requiring emergency military intervention to maintain or restore peace. This is their raison d’être. By deciding that the authorized operation should be carried out in conjunction with the local police, the Security Council is breaking new ground.

What’s more, and this is even more curious, the resolution asks those in charge of the Mission (Kenya, or possibly another state that would take the lead), in coordination with the Haitian government, to communicate to the Security Council information concerning “the goals of the mission and the end result sought, the rules of engagement” prior to the deployment of forces on the ground. In clear terms, this means that it is the participating states, in consultation with the Haitian authorities, who will define the Mission’s operational and final objectives.

This is unprecedented. Never before in the history of the United Nations has an authorized operation had to define its own objectives, never mind in cooperation with the authorities of the state in which it is intervening. In principle, it is up to the Security Council to define the objectives of the mandate, and to monitor and supervise its execution. It cannot delegate this power to a third party. Nor does the Council need the approval of the state concerned to determine the objectives of the mandate of an authorized operation adopted under Chapter VII of the Charter, even if it is the state that requests it. In the latter case, the Council may, if it sees fit, authorize the state concerned to participate simply as an observer in meetings of the “steering committee” for the operation, as was the case with Albania in 1997 (S/1997/362, par. 7). But the state’s participation is not decisive, still less in defining the terms of the mandate. The Security Council is therefore setting a new precedent. No previous resolution adopted in connection with the creation and deployment of a coercive international military operation contains provisions of this kind.

As a result, the nature of the Mission in Haiti is ambiguous. It is an authorized operation created under Chapter VII of the Charter, even though its main characteristics diverge from this type of mission. In reality, it is a U.N. peacekeeping operation created under the umbrella of an authorized operation. Almost all its features, from the question of operational support for the national police to the involvement of the government in determining objectives and rules of engagement, are peacekeeping in nature. It is a hybrid mission combining elements of the collective security system (Chapter VII) and the peacekeeping system but ultimately establishing an institution with an uncertain legal status, that is, a mission which in practice clearly does not fit into any of the categories of institutionalized international military intervention hitherto known.

Because of these legal uncertainties, the MSS Mission is not without its political and legal concerns.

II. Political Issues: The Question of Ineffectiveness

Established on foundations as unstable as they are superficial, the operation authorized in Haiti is undoubtedly fragile. This shortcoming could undermine its effectiveness. It is hard to understand why the Security Council should so lightly authorize an international mission that will mobilize so many resources in a country that is only asking for real support from the international community to solve its problems. One of the consequences of the ambiguities in the Mission’s mandate will be that any disagreement between the operations directorate and the Haitian police or authorities will paralyze their actions. The Haitian government undoubtedly has its own agenda, its own understanding of the problems, and its own solutions. The countries involved also have their own. Compromises will have to be made every time. Will this compromise always be possible? At this stage, it is hard to say.

In the meantime, suffice it to say that while this kind of arrangement, which seems to take Haiti’s sovereignty and independence into account, is not a bad thing in itself, it is something to be wary of. We would be surprised if the Mission were effective in such circumstances. But more fundamentally, there is a risk of disempowerment. For, in the end, it will be easy for those in charge of the Mission to point to the fact that cooperation with the Haitian authorities has not worked well to justify a lack or even an absence of results. What’s more, when Security Council resolutions authorizing a mission are ambiguous, the states involved tend to interpret them for their own benefit, for example by considering their mission accomplished and withdrawing their troops, particularly if they have suffered losses on the ground, as was the case in Somalia.

The vagueness identified in the definition of the mandate of the operation authorized in Haiti can have another, even more devastating consequence: misuse of the Mission. Indeed, in this type of operation, there is always a risk of deviation or instrumentalization. However, the risk becomes even greater when the resolution authorizing its implementation does not sufficiently clarify the mandate, does not clearly spell out what is authorized and what is not, and does not precisely delimit the scope of the intervention. In Libya, for example, Resolution 1973 (2011) did not authorize the overthrow of the Libyan government, contrary to what actually happened. Intervention forces have interpreted it broadly. The lack of precision in these parameters in the resolution adopted on October 2 could lead to a deviation from the mandate of the operation authorized in Haiti, which would ultimately be a disservice to the population we are supposed to be helping.

III. Legal Issues: The Question of U.N. Responsibility

Because of these essential ambiguities, the MSS Mission also raises the fundamental legal concern of responsibility. This is an important issue, given the risks of violations of international law, in particular international humanitarian law and human rights law, during the military intervention. This is especially so in a country like Haiti, where the question of U.N. responsibility has been the subject of debate in the recent past, even though there was not a shadow of a doubt as to whether the mission responsible for the illicit acts (MINUSTAH) belonged to the United Nations. The situation therefore becomes very worrying when the intervening mission is one whose legal nature is not very clear.

And with good reason: according to the United Nations, a distinction must be made between operations authorized by the United Nations and carried out under national or regional command and control, and U.N. operations carried out under their command and control, when assessing imputability to the United Nations (A/CN.4/637/Add.1, p. 10). In the case of U.N. operations, there are two hypotheses to be considered. First, if the operations were carried out jointly by a U.N. force and a force under national command and control, such as the U.N. Operation in Somalia II (UNOSOM II) and the U.S.-led Rapid Reaction Force in Somalia, the conduct of the troops would be attributed to the entity exercising operational command and control. Second, if the operations were carried out by peacekeeping forces, as was the case with U.N. Stabilization Mission in Haiti (MINUSTAH), the Secretary-General considers that, given these forces’ status as subsidiary organs of the United Nations, the conduct would be attributed to the United Nations.

On the other hand, when it comes to operations authorized by the Security Council, as is the case with the Mission to be deployed in Haiti, the United Nations declines all responsibility. According to the venerable organization, international responsibility for operations authorized by the Security Council under Chapter VII of the Charter and conducted under national or regional command and control lies with the state or states conducting the operations in question (A/CN.4/637/Add.1, p. 10). This was the case, for example, in Somalia during Operation Restore Hope, when a car accident occurred. The United Nations declined responsibility on the grounds that the person involved in the accident was working for Operation Restore Hope and not for the UNOSOM. According to the United Nations, the troops of the Unified Task Force were not under its command.

A priori, this should not pose any particular problem if, once established, the responsibility of the state or states could be called into question without any particular difficulties. In practice, however, there is no room for optimism. In most of the authorized operations in which international obligations have been violated and lawsuits brought against the states concerned, the latter have constantly tried to absolve themselves of responsibility by insisting on the central role of the Security Council, and ultimately on the responsibility of the United Nations. This was the case, for example, with the appeals against Kosovo Force (KFOR). While for the plaintiffs, KFOR’s actions or omissions could not be attributed to the United Nations, for the targeted states, on the contrary, KFOR’s actions were indeed attributable to the United Nations. Moreover, both international and national judges have so far refused to rule on the conduct of multinational forces. This creates a gap between the principle of state responsibility for acts committed during an authorized operation and the actual implementation of their responsibility for said acts.

Hence the importance of clarifying the legal nature of the Mission. As already mentioned, the Mission to be deployed in Haiti has the appearance of a U.N. mission in terms of its characteristics, but it is officially an authorized operation. This means, therefore, that the United Nations will not be held responsible for any misadventures that may occur during operations. They automatically rule out any possibility of linking any illicit acts to them.  This is an important legal issue, particularly in a country where the United Nations has shirked its responsibility for damage committed by an international force that was its own. The Haitian government, politicians, and civil society need to be aware of this aspect of the issue.

Conclusion

Ultimately, the authorization of the international military force is not a bad thing, given the situation in Haiti. The Haitians could not take it anymore. Even the intellectuals and other actors traditionally opposed to any international military intervention were for the most part in favor or almost in favor of military intervention, subject to certain conditions. However, the mission that has been set up has shortcomings in its design that leave us perplexed and questioning. Finally, the main, if not the only real virtue of the resolution adopted by the Security Council lies in the fact that it commits the intervening states to act within the framework of the law. It remains to be seen whether this rare virtue will enable the mission to succeed in its challenge, that is, to set an example, bring peace to Haiti, and enable the Haitian people to resume the normal course of their lives, not only for the duration of the operation but beyond.

*Moise Jean is a postdoctoral researcher at the University of Geneva, in the Department of International Law and Organization. He is very grateful to Jacob Libby for his very thoughtful comments and edits.

Cover image credit

Craving Climate Carveouts

Craving Climate Carveouts

Ariq Hatibie*

Introduction

The international system of investor-state dispute settlement (“ISDS”) is increasingly scrutinized for the challenges it poses to climate change mitigation efforts. Policies such as carbon taxes, fossil fuel bans, and nationalization are vulnerable to expropriation claims by investors, raising the costs and risks of the energy transition. I evaluate a proposed solution to make ISDS greener: the climate carveout. This treaty provision preserves regulatory capacity by stating that certain investments are not protected or that states can lawfully take specific measures based on the purpose of protecting the environment.

I argue that the literature overestimates the benefits of this reform. Even if states can include such carveouts in their international investment agreements (“IIAs”), investors possess procedural and substantive doctrinal tools to circumvent them. First, tribunals have used interpretive doctrines to hold that, while the measure is not per se illegal, states must still compensate the investor. Second, investors can exploit most-favored-nation (“MFN”) clauses to import more favorable treatment from other treaties to diminish the carveout’s effect. Finally, investors can forum shop to leverage other more favorable IIAs. The doctrinal and systemic features of ISDS combine to stymie the benefits of climate carveouts.

I. Introducing Climate Carveouts: Two Types

Climate carveouts come in two forms. First, they could exclude investments (e.g., in fossil fuels) from protection. Past examples in tobacco control include provisions that say, “[n]o claim may be brought under [this section] in respect of a tobacco control measure of a Party.” Hence, an investment-based carveout excises the investments from a tribunal’s jurisdiction ratione materiae. In contrast, a purpose-based carveout preserves a state’s right to take certain measures that protect the environment, enabling a merits-based defense. Such a provision could affirm the “right to regulate … to achieve legitimate policy objectives, such as the protection of … the environment …”

Climate carveouts have seen some success. Al-Tamimi v. Oman concerned revoking a mining company’s license for failing to get operational permits and other environmental violations. The U.S.-Oman Free Trade Agreement contained a clause the tribunal interpreted to “reserve a significant margin of discretion to themselves in the application and enforcement of their respective environmental laws.” Not only did the provision articulate the “right” to enforce environmental laws, but Article 17.2.1(a) provided that “neither party shall fail to enforce its environmental laws” (emphasis added), indicating a duty to protect the environment despite the agreement’s focus on free trade. The tribunal used this provision to interpret whether Oman had violated the treaty obligation to accord investors a minimum standard of treatment. Using Article 17.2.1 to inform its reading, the tribunal acknowledged that it must be “guided by the forceful defence of environmental regulation and protection provided in the express language of the treaty.” Al Tamimi demonstrates that inserting environmental clauses in IIAs can empower greener regulations.

II. Critiquing Climate Carveouts: An Optimistic Over-Estimation

Despite the above success, three features of the ISDS system mitigate the impact of climate carveouts: [A] interpretive clear statement rules that enshrine a duty to compensate, [B] MFN provisions that allow investors to import stronger investor protection provisions from other investment treaties, and [C] leveraging the flexibility of the global investment system to forum shop.

A. Circumventing the Carveout through Clear Statement Rules

One challenge to carveouts is articulating clear statement rules, as exemplified by Eco Oro v. Colombia. There, Colombia deprived an investor’s mining rights by declaring the relevant area an environmental zone. The Canada-Colombia IIA provided a carveout saying, “nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing … environmental measures necessary to protect human, animal or plant life and health,” and “the conservation of living or non-living exhaustible natural resources.” Although both Colombia and Canada confirmed that this carveout intended to protect environmental measures, and although the language stated that “nothing” would prevent a party from regulating to protect the environment, the tribunal nevertheless stated that “there is no provision in Article 2201(3) permitting such action to be taken without the payment of compensation.” (emphases added). The investors prevailed because the treaty failed to explicitly deny the investor compensation: states can regulate to protect the environment—they just have to pay for it. In other words, the tribunal elucidated a clear statement rule, a presumption of the duty to compensate. As commentators have noted, tribunals “are well capable of creating interpretive deadlocks by convenient or erroneous readings of relevant provisions.” The tribunal’s clear statement rule imposes negotiating costs on states. Indeed, the judgment itself will likely place similarly worded agreements in investor crosshairs, and given that such language is common in, e.g., all of Canada’s newer trade agreements, one wonders whether negotiating those carveouts was worth the trouble.

Given that international investment law, and international law generally, does not contain rules of binding precedent, investors can try their luck even if precedents like Al-Tamimi v. Oman exist. Investors will likely take the risk because of the gargantuan monetary awards available. In Eco Oro, the investors sought a USD $350 million judgment, although the tribunal postponed actual quantification for a later date.  Even if investor success is unlikely, the enormous potential reward renders the expected payoff worth it. This risk of arbitration continues to deter states from enacting environmental protections.

B. Using MFN Provisions to Import Looser Environmental Protections

Eco Oro demonstrates a circumvention method internal to the IIA. Another move is to use an MFN clause, which enables the investor to import more favorable treatment from other treaties into the one currently being applied (known as the “basic” treaty). A clause could read, “[n]either Contracting State shall subject investments in its territory … to treatment less favourable than it accords … to investments of investors of any third State.” MFN clauses are justified on the basis that investors from one country should not receive worse treatment than those of other countries. Using an MFN clause involves identifying another treaty with weaker environmental provisions and importing them to the present dispute. So far, investors have failed to use MFN to expand jurisdiction over the types of protected investments within a treaty. Hence, investment-based carveouts that remove fossil fuels from investment protection will likely not be affected. Rather, MFN clauses apply to the substantive treatment accorded to investments, which may affect carveouts that preserve the right to impose environmental regulations.

Indeed, investors have invoked MFN clauses to bypass carveouts in other subject areas. In CMS v. Argentina, the investors sought to avoid a clause providing that “[t]his Treaty shall not preclude the application … of measures necessary for …  the protection of its own essential security interests,” under Article IX of the Treaty. They argued that because other treaties do not contain a similar “essential security interests” clause, the tribunal should treat the immediate Treaty as also lacking a clause. The tribunal rejected this reasoning, but only because an absence of carveouts in other treaties does not trigger the applicability of the MFN. If a similar clause does exist but with better treatment, the tribunal was open to considering its importation.

Consider a carveout in Treaty A, modeled on CETA, that preserves “right to regulate … to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals . . . ,” including a clarification specifically protecting the withdrawal of subsidies. Treaty B contains a similar “legitimate policy objectives” provision for public health and morals but without the environment. An investor could argue that both clauses deal with the same question: what counts as a “legitimate policy objective”? The absence of “environment” in Treaty B’s clause would suggest that for some nationals, the environment is not a legitimate objective, but for the other nationals affected by Treaty A, the environment is. Arguably, investors in similar circumstances are treated differently simply by virtue of a different nationality, potentially violating the MFN principle.

MFN clauses can account for more precise variations in protection: another treaty may specify that some environmental measures (e.g., withdrawal of subsidies) are protected but not others (e.g., expropriation of fuel investments). Another treaty might emphasize the duty to compensate. When negotiating carveouts, states may have to re-negotiate MFN clauses or pay attention to their entire inventory of treaties to minimize the importation of investment-protective clauses.

C. Finding Favorable Forums

Another investor strategy is exploiting the ISDS regime’s slipperiness to shop for a forum with more favorable protections. The tobacco carveouts provide a salient example. During negotiations of multilateral agreements, civil society organizations pressed governments to include carveouts for tobacco control, such as in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. However, states still belonged to other bilateral agreements, all of which could be used to forum shop. For example, while an Australian investor in Vietnam could not exploit the multilateral treaty to take Vietnam to arbitration, a bilateral treaty could still give them a cause of action. Pendas and Mathison observe that tobacco investors could use forty other investment agreements between the states parties to keep the arbitration door open.

In addition, investors can use an IIA with another country as long as they fulfill the personal jurisdiction requirements. If the corporation has a subsidiary or co-shareholder with a different nationality, it can launch a parallel claim to get another shot at the goal. If it cannot find another IIA, it can even restructure to find a country with more favorable investment protections, such as when the investor in Pac Rim v. El Salvador changed their seat of incorporation from the Cayman Islands to the United States to avail themselves of the Central American Free Trade Agreement. In practice, the “abuse of process” doctrine limits egregious instances of this forum shopping, particularly when the company restructures immediately before a foreseeable regulatory change. However, the strategic pathways for movement make corporations, especially transnational ones, difficult to tame. Thus, investors can forum shop in three ways: moving from the multilateral to the bilateral (or vice versa), across treaties, and across jurisdictions. The suppleness of the ISDS regime mitigates the impact of climate carveouts.

Conclusion

Despite the attraction of bolstering the treaty language to defend against arbitration claims, the above features diminish the effect of climate carveouts. First, investors can persuade the tribunal to interpret the treaty text through clear statement rules, as Eco Oro v. Colombia demonstrates. Second, investors can exploit MFN provisions to import more favorable rules from other treaties. Finally, investors can shop for the ideal forum by moving from the multilateral to the bilateral plane or restructuring to take advantage of other IIAs. Even if states can renegotiate treaty provisions to buttress against doctrinal moves, systematic features of the ISDS system will continue to grant protection. If investors can slip and slide through that system, the effect of carveouts, or the cost of making them effective, is not so rosy.

*Ariq Hatibie is a 3L at Harvard Law School broadly interested in public international law, including investment law and human rights. He holds an M.Sc. in Global Governance and Diplomacy from the University of Oxford and a B.A. in Global Affairs from Yale University.

Cover image credit 

A Global Standard Setter for Virtual Currencies:  A Case for Strengthening International Financial Law

A Global Standard Setter for Virtual Currencies: A Case for Strengthening International Financial Law

Juan Carlos Portilla*

Introduction

Because a paradigm shift is currently underway in the international monetary system, international financial regulators should establish a global standard setter for virtual currencies (“VCs”). This article will refer to such an entity as the Global Agency for the Virtual Currency Economy (“GAVCE”). Two monetary ecosystems coexist today. The first ecosystem involves central banks and depository institutions that supply economies with fiat currency; the second includes VCs. VCs emerged in 2009 “as a means of defiance against a financial system in crisis and ‘captured’ by state regulation and private agents.” For some, VCs inspire a level of confidence that money managed by central authorities might not sustain. Nevertheless, the rise of VCs also implicates important risks including market manipulation and financial crime—and governments across the globe are struggling to regulate VCs because of their disintermediated technological constitution.

Although the European Union agreed in June 2023 on a provisional version of the Markets in Crypto Assets framework, and while some scholars in the United States are making the case for self-regulation in the VC industry, this article argues for some form of global governance intervention in case these or other mechanisms fail. Regulations must protect VC consumers from market failure, asymmetric information, and negative externalities. Yet, most countries have not taken any regulatory action on VCs, creating significant regulatory gaps. According to the World Economic Forum, regulatory systems governing VCs are “fragmented, ineffective, and, in some countries nonexistent.” Because there is no harmonized global regulatory governance for VCs, criminal enterprises can engage in regulatory arbitrage across nations to commit financial crimes, such as the financing of terrorism and money laundering. Therefore, international financial law should establish a GAVCE to regulate VCs.

This article draws upon the interdisciplinary dialogue between international law (“IL”) and international relations (“IR”) scholarship to make the case for a GAVCE. In Part I, the article introduces blockchain technologies and the VC ecosystem. Part II outlines emerging risks related to VCs and discusses matters of law related to the establishment of a GAVCE. Finally, Part III discusses the politics that would emerge while establishing global governance for VCs, which implicate regulatory capture theories and the role of time as an analytical variable, in the rule-making process.

I. Introducing Blockchain

VCs are peer-to-peer electronic cash systems that use blockchain technology to operate without the need for intermediaries (banks). According to a memorandum by presumed Bitcoin creator Satoshi Nakamoto, the peer-to-peer nature of VCs “allows online payments to transfer directly from one party to another without routing through a financial institution.” Blockchain technology, in turn, gathers information (a ledger for transactions) into “blocks” that hold it. Blocks have storage capacities; ledgers for transactions are placed into a block until it is filled. Once a block is filled, it is then closed and immediately linked to the previously filled block. This process forms a chain of information (a “blockchain”), whose blocks are linked through cryptography, creating a peer-to-peer electronic cash system. Thus, VCs “are distributed, open-source, math-based peer-to-peer virtual currencies” that can operate with no central bank involvement, no intermediaries, and no government oversight.

VCs are different from fiat currencies, e-money, and central bank digital currencies (“CBDCs”). While fiat currency is the paper money of a country that is designated to be its legal tender, and accepted as a medium of exchange, VCs are digital representations of value that can be digitally traded, and they are typically neither issued nor guaranteed by governments. VCs are also different from e-money, which digitally represents fiat currency and is utilized to electronically transfer the value denominated in fiat currency. Although some countries have used blockchain technology to issue CBDCs, like the digital yuan of China, CBDCs do not fully encapsulate all of the attractive features of VCs, such as anonymity, decentralization, and governance. While central banks that issue CBDCs decide on the rules governing those CBDCs, the users of VCs control VC networks by making consensus-based decisions. 

The VC Ecosystem

Several specific VCs—including Bitcoin and Ethereum—are well-known to the public. Bitcoins, which are convertible units of account composed of unique strings of letters and numbers constituting units of the currency, are decentralized in nature. Since individual users are willing to pay for Bitcoins and other VCs, they have value in the marketplace. Ethereum, Ripple, Litecoin, and Dashcoin came after Bitcoin and utilize a similar form of blockchain technology. Stablecoins, in turn, are VCs backed by fiat currencies, like the U.S. dollar, or commodities, like gold. Tether, for example, is the largest stablecoin by market capitalization and its value is pegged to the U.S. dollar.

Several different actors make up the VC market. The supply side of the VC market consists of exchange firms, such as Binance. Supply-side firms also include administrators, miners, and wallet providers. Exchangers, for a commission, trade VCs for other VCs—or for precious metals or fiat currencies. Administrators are individuals or legal entities that issue VCs, write rules for the use of VCs, maintain central payment ledgers, and redeem VCs. Miners act as market makers; they use computer systems to verify transactions by adding them to the blockchain. VC wallets hold, store, and transfer VCs (examples of wallet providers include Multibit or Coinbase). Finally, users compose the demand side of the VC market. Users exercise their freedom of choice to select VCs and they generally buy VCs for payment or investment needs.

II. Emerging Risks

Emerging risks related to VCs include consumer panic, market manipulation, and financial crime. Confidence is a bedrock principle of the modern financial system. Unlike traditional financial products (such as savings accounts), Bitcoin and other VCs are presently uninsurable—which undermines investor confidence and heightens the risk of consumer panic. When an individual in the United States deposits money with a bank in a single ownership capacity, he or she has access to up to U.S. $250,000 at the Federal Deposit Insurance Corporation (“FDIC”) if the bank fails for the U.S. dollar is backed by the full faith and credit of the U.S. government. In contrast, government deposit insurance is not available for VCs because they are not regulated or backed by any government. Additionally, the price history of VCs demonstrates that the VC market may in fact be a speculative bubble. Bitcoin investors can manipulate its price; for example, media coverage of Bitcoin or fake news associated with Bitcoin can induce individuals who have not previously traded Bitcoin to invest in it for the first time. In the absence of a central government authority backing the value of Bitcoin, Bitcoin investors could lose their shirts, were Bitcoin to fail.

According to Nobel Prize-winning economist Joseph Stiglitz, VCs are also often used for illicit purposes such as tax evasion. According to the Financial Action Task Force (“FATF”), money launderers, terrorist financiers, and sanctions evaders use VCs as a powerful tool for financial crime endeavors, outside the reach of law enforcement. Indeed, bad actors can and often do use technology and Bitcoin to pursue chaos and perpetrate financial crimes. One example is the May 2017 WannaCry ransomware attack, in which a worm component exploited vulnerabilities in the widely used Microsoft Windows operating system. Ultimately, the cyberattack cost eight billion US dollars in damages. The criminals behind the attack demanded payment in Bitcoin because they have easy access to VC service providers around the world.

III. Global Governance for VC

Multiple instruments, including but not limited to treaties, may be used to create a GAVCE. Traditionally, states have been the primary source for the creation of international organizations (“IOs”), particularly by way of international treaties. Examples of this approach include the International Monetary Fund Articles of Agreement. Nevertheless, many legitimate and powerful IOs have also originated outside of the treaty process. These IOs, with more innovative institutional designs, have increasingly found their way into the international legal order. For example, the central bank governors of the G-10 countries established, without a treaty, the Basel Committee on Banking Supervision (“BCBS”)—the primary global standard setter for the prudential regulation of banks. Likewise, the International Organization of Securities Commissions (“IOSCO”)—the international body recognized as the global standard setter for securities—is not a treaty organization but rather a not-for-profit legal entity incorporated under a private act in Quebec, sanctioned by the Quebec National Assembly. FATF—the global money laundering and terrorist financing watchdog—is similarly not a treaty-based international organization but rather a task force composed of member states who fund FATF on a temporary basis for the achievement of specific mandates. Decentralized government agencies, under the control of the executive branch of national governments, can also form IOs; in 1995, a network of national financial intelligence units established the Egmont Group, which provides a platform to exchange financial intelligence to combat financial crime. In sum, there are multiple legal instruments besides treaties available to create a GAVCE.

Considering the above, domestic regulatory agencies should establish GAVCE outside the treaty-based model, which involves a slow and politically costly ratification journey. Although the establishment of GACVE outside the treaty process may face concerns related to legitimacy or a perceived democratic deficit, a more efficient approach here is warranted because of the urgency of the issuance of global VC regulations as well as the widely recognized success of other non-treaty based IOs like IOSCO.

The proposed GAVCE should also have the capability to influence relations amongst states, market agents within the virtual currency economy, and multilateral financial institutions. GAVCE should build power and influence from the inside out to affect the behavior of states when regulating VCs; to achieve this, domestic regulatory agencies should delegate certain law-making capabilities to GAVCE to regulate VCs. This act of delegation upon GAVCE is feasible because IOs can be explicitly empowered to make international law through a delegated law-making process, which is best explained under the principal-agent theory, mainly associated with corporate law. The principal-agent theory can be applied to the relationship between state actors and global standard setters under international law. According to Ian Johnstone of the Fletcher School of Law and Diplomacy at Tufts University, the simplest form of delegation exists in this context when states explicitly grant authority to IOs, because it is typically fairly straightforward to identify the agent, the principals, and the powers that the principals have conferred.

Although this type of delegation to GAVCE may face criticism related to a loss of sovereignty or the risk of capture by special interests, several distinct benefits of delegation outweigh those concerns. First, the delegation at issue will be limited in scope—exclusively to the world of VCs. As such, there is no significant incursion on state sovereignty. A second benefit of delegation is the standardization of norms across jurisdictions to avert regulatory arbitrage and mitigate financial crime. As previously stated, current regulatory systems governing VCs are fragmented, ineffective, and often nonexistent. Third, there is currently a dire need for regulatory experts to develop technical skills related to the various complex features of VCs, blockchain, and exchangers. The development of such expertise through the proposed GAVCE would in turn help the international community to sow the seeds for a good governance model for the VC market. Under this good governance approach, global crypto policymakers would make decisions, through the proposed GAVCE, based on data and widely accepted methodologies to protect the virtual currency economy from the risks outlined above.

Another way to reduce the risks of delegation and institutional capture is for GAVCE to issue soft law rather than hard law. International law is more than just a formalistic set of black-letter rules; a more pluralistic conception of international law, embraced by many scholars today, also considers soft law, which is formally non-binding but habitually obeyed. According to Shaffer and Pollack, states do not always only favor the hard law model when making international law and instead often adopt the soft law approach, as a design choice. Although the concept of soft law may be problematic to legal positivists because it suggests a continuum between political and legal commitments, functionalist scholars argue that soft law norms offer several advantages over hard law, including 1) greater flexibility for states to cope with uncertainty, 2) greater opportunity for states to gain expertise over time through information sharing and deliberation, and 3) lower negotiation costs. In this context, hard law does not provide states with the necessary flexibility to deal with the uncertainties of VCs, because VCs are an emerging, ever-changing technology. Soft law will better accommodate the shifting nature of VCs.

Politics of International Corporate Capture

Concerns about international corporate capture may play a significant role in the establishment of a GAVCE, as corporate capture could materially affect the substantive outcomes of GAVCE’s eventual regulations. Institutional theory, regulatory capture, and the role of time as an analytical variable are all key topics that capture the attention of scholars when analyzing global financial rule-making processes. The politics that revolved around BCBS while it began to regulate international banking set a precedent that leaders should consider in the process of regulating VCs. Indeed, there are different sets of conditions that result in captured regulation, which serves narrow vested interests, versus common interest regulation, which serves the broader public interest.

Indeed, global VC regulators would not be immune to the risk of regulatory capture by self-interested actors and powerful interest groups. If VC firms were to capture GAVCE’s rulemaking, they might pursue policies that would be contrary to the public interest. One hypothetical example to illustrate the risk of VC capture would be a rule allowing the issuers of stablecoins to use an algorithm-based system to maintain their peg to the U.S. dollar instead of a system of cash reserves. History proves that such a rule would have costly effects; TerraUSD—a U.S. dollar stablecoin that sparked a crisis in VC markets in 2022—used an algorithm-based system rather than cash reserves to maintain its peg to the dollar, causing it to lose its price peg during a crisis of liquidity in early 2022.  During this crisis, investors expected to be able to cash out the stablecoin for one U.S. dollar at any point, but ultimately were not able to when TerraUSD lost its price peg. The TerraUSD meltdown caused losses of $300 billion across the broader VC market.

To prevent corporate capture and scenarios like the above, scholars have presented theoretical frameworks that emphasize the importance of timing and sequencing in determining rulemaking outcomes in global finance. For instance, a close examination of Basel Committee deliberation records and other key documents provides strong evidence that the first movers in the Basel process, namely powerful international banks, played a key role in determining the Committee’s outcomes. Domestic regulatory agencies should carefully consider time and sequencing to prevent large VC groups from arriving at the decision-making table well before others. The first-mover advantage cannot be part of the regulatory process for VCs. In addition, transparency around lobbying and the establishment of a “cooling off” period after serving in the private sector can prevent powerful VC firms from capturing GAVCE’s rulemaking.

Conclusion

So far, VCs have largely escaped from the regulatory grasp of national governments. Because there is no harmonized regulatory governance regime in place, VCs are often used for illicit purposes. International law must regulate VCs to strengthen the governance of the overarching global financial architecture. Multiple instruments, including treaties and non-treaty mechanisms, are available to create a GAVCE that can issue soft law to regulate VCs. Nevertheless, non-state actors may also pose regulatory capture risks concerning the global VC rule-making process. Global policymakers should take careful measures to avert regulatory capture if they decide to establish a global standard setter for VCs.


*Juan Carlos Portilla is an International Financial Law Professor at Sabana University School of Law (Colombia) & Anti-Corporate Crime Law Professor at the ITAM Law School (Mexico), an ACAMS Speaker, a Legal Consultant and a Compliance Professional at several different global financial institutions including the Central American Bank for Economic Integration (Honduras), Santander Securities LLC, Raymond James Financial Services Inc., Wise Ltd (a fintech company), and Wells Fargo NA. Juan Carlos is a lawyer with a LL.B. degree from Sabana Law School, Colombia. He earned a master’s degree in international law from the Fletcher School of Law and Diplomacy, Tufts University, and completed the Program on Negotiation and Dispute Resolution course at the Harvard Law School.


Cover image credit 

A Defense for Guardian Robots: Are Defensive Autonomous Weapons Systems Justifiable?

A Defense for Guardian Robots: Are Defensive Autonomous Weapons Systems Justifiable?

Rizky Citra Anugrah*

Introduction

The humanitarian crisis in Gaza highlights the persistent struggle to enforce international humanitarian law (IHL), a legal framework aimed at mitigating the devastating consequences of armed attacks, particularly the loss of innocent lives. Within just one week, we were confronted with a toll of approximately 3,500 lives lost, with no less than 2,215 belonging to the Palestinian people. In contrast, over the years, Israel has consistently experienced significantly lower casualties. This asymmetry raises a complicated question at the intersection of ethics, technology, and justice: what role does cutting-edge technology play in this equation, and can it contribute to upholding humanitarian principles in the face of such immense suffering?

To understand Israel’s relatively low casualty rate, we must delve into the deployment of the world’s most advanced defensive autonomous weapons system (DAWS), known as the ‘Iron Dome.’ Marco Sassòli, a professor and leading expert on international law at the University of Geneva, Switzerland, affirmed that the Iron Dome has helped Israel reduce its civilian casualties despite the arbitrary targeting by Hamas’ traditional rockets. Introduced in 2011, this defense system has been claimed to have a 97 percent success rate in intercepting incoming missiles. Put into context, Israel’s weekly average of around 3,000 incoming missiles translates to approximately 415 successful interceptions daily.

To get this number, the Iron Dome operates through three key components: radar, control, and battery. First, its radar detects incoming missiles and other airborne threats, distinguishing their size, velocity, and type. Second, the control acts as the ‘brain’ of the operation, employing algorithms and, more recently, artificial intelligence (AI) to guide interceptor rockets toward their targets automatically, even when the incoming missiles exhibit erratic movements. Additionally, it can prioritize intercepting missiles aimed at populated areas. Lastly, the battery fires two interceptors at each incoming missile and can release up to 20 interceptors at a time.

While Israel stands out as a prime example of the application of the world’s most advanced AI-powered DAWS, it is far from being the sole user. The United States, a co-producer of the Iron Dome, has ventured into testing the system’s application in Guam. Meanwhile, the United Kingdom is making significant progress in developing the DragonFire, a DAWS that harnesses concentrated laser beams to safeguard both land and maritime targets. Israel has taken a similar approach to developing the Iron Beam, which is designed to be a cost-efficient alternative to the Iron Dome.

Generally, autonomous weapons systems (AWS) have seen decades of use, but not all have been employed exclusively for defensive purposes. Recently, we have witnessed their integration with AI technologies, enabling these systems to operate substantially independently from human interference. In response to this growing threat to human dignity, there is an uprising movement to limit the further developments of AWS, with some advocating for stopping its development entirely. Spearheaded by the Campaign to Stop Killer Robots, this coalition has made significant progress in raising global awareness about the escalating threats posed by autonomous weapons. Particularly noteworthy is the coalition’s Vote Against The Machine campaign, which prompted the United Nations (UN) General Assembly to adopt Resolution L.56, entitled “Promoting International Cooperation on Peaceful Uses in the Context of International Security,” in October 2023. Sponsored by 44 states, the proposal has garnered the support of 120 other states, calling for all states to address the humanitarian, legal, and ethical risks posed by AWS.

I. The Case for Defensive Autonomous Weapons Systems

While extensive discussions and policies have delved into the legal and ethical challenges associated with lethal autonomous weapons systems (LAWS), a noticeable gap exists with DAWS. In the discourse on AWS, the focus has predominantly gravitated toward LAWS, often overlooking the existence and potential of AWS designed exclusively for defensive purposes. Furthermore, the terminology used in these discussions has contributed to this oversight. The term AWS is frequently used interchangeably with ‘Killer Robots,’ emphasizing the perception of autonomy in weapons systems predominantly geared toward offensive actions. In Resolution L.56 itself, although the title explicitly concerns LAWS, the umbrella term of AWS is still used repeatedly throughout several clauses. It is essential to acknowledge that weapons, in general, are not exclusively developed for offensive purposes. In this context, Black’s Law Dictionary provides an inclusive legal definition of ‘weapon’ as “an instrument of offensive or defensive combat.” In the realm of lexical discourses, weapons are inherently recognized as serving two opposing functions. However, this duality is often overlooked in legal discussions surrounding AWS. In light of this reality, this article proposes introducing a new term, ‘Guardian Robots,’ as a synonym for DAWS, aiming to provide a balanced perspective.

The differentiation between DAWS and LAWS is crucial because several ethical and legal considerations driving the push for a ban on LAWS are not applicable to DAWS. First and foremost, LAWS are often challenged on the grounds that they cannot comply with IHL, which requires adherence to the principles of humanity, distinction, proportionality, and military necessity. These arguments are based on the fact that current AI technologies are incapable of making decisions to the extent humans can. Indeed, AI is not yet technologically advanced enough to differentiate a surrendering soldier from a civilian who might be carrying weapons for defense. However, DAWS do not even need to make such decisions because of its purpose to exclusively aim at offensive weapons. Conversely, it can help and has helped humans in upholding humanitarian principles. For instance, the Iron Dome’s capability to target only missiles directed at civilian areas can help both the aggressor and the defender align with the goals of the distinction principle in IHL, significantly protecting civilian lives.

Another common argument supporting legal limitations on the development and deployment of LAWS revolves around the concept of meaningful human control (MHC). MHC is rooted in the philosophical discussions surrounding AWS, with the primary objective of constraining the reduction of significant human oversight and deliberation in weapons deployment. Two fundamental principles guide the preservation of MHC. The first principle dictates that weapons systems should not be able to apply force and operate without any form of human control. The second principle highlights the notion of ‘meaningful’ control, asserting that pressing a ‘fire’ button falls short of constituting substantive human oversight.

Some scholars argue that, while permitted, automation must be largely restricted to ensure significant human control in AWS. Others have pointed out that even a limited role for automated systems in AWS decision-making promotes an authority imbalance, perpetuating automation bias and ultimately influencing the human operator who should be in charge of the system. Automation bias is a psychological phenomenon in which individuals tend to favor decisions made by automated systems over their own judgments, even when the automated decision is proven inaccurate. Undeniably, automation bias and systematic errors are not exclusive to LAWS and can also arise in the decision-making of DAWS. However, the substantial benefits of widespread DAWS deployment far outweigh the potential drawbacks. Unlike LAWS, in which error exacerbates its already-destructive nature, DAWS only poses a risk in cases of extreme malfunctions. So far, the Iron Dome’s failures have been linked almost exclusively to the inability to intercept missiles without any breaches of IHL principles. Moreover, the Iron Dome is classified as a weapon with a very short launch range. This limitation prevents the Iron Dome from becoming lethal. Given the Iron Dome’s exceptionally high success rate, DAWS’s lawful and comprehensive technological development remains unlikely to pose lethal concerns during errors.

This proposition can be further argued to assert that, in the evolving landscape of military weaponry, autonomous defenses are not only beneficial but also essential for upholding IHL principles. Even without LAWS and AI technologies, military weapons are developed in increasingly complex ways that often surpass human capacity for effective defense. Due to its precision and rapid response capabilities, DAWS can be strategically deployed in vulnerable areas or sectors where the threats are beyond human control. Even in cases where DAWS fail to completely stop an attack, its role in mitigating its consequences can significantly help uphold IHL’s principle of proportionality. When sufficiently developed, the utilization of DAWS is pivotal in significantly reducing civilian casualties, as evidenced by the Iron Dome.

II. The Challenges of Defensive Autonomous Weapons Systems

Nevertheless, the pursuit of lawful development for DAWS while eliminating LAWS is not without its unique set of challenges. The first fundamental concern revolves around the definition of ‘defense.’ To what extent does the use of AWS qualify as an act of defense? The Caroline Doctrine provides a clear framework for ‘anticipatory’ self-defense, allowing a response when the need to react is “instant, overwhelming, and leaves no choice of means, and no moment for deliberation.” It readily addresses the permissibility of actions based on whether they constitute an attack or a counterattack. If the counterattack aligns with the criteria outlined in the Caroline Doctrine, it can be considered a lawful and justifiable response to an action initiated by another party. However, this doctrine is only relevant to decide whether or not the start of a defense is justifiable.

The definition of defense becomes increasingly blurry when it comes to the proportion of the counterattack. Two common yet contradictory parameters are often used to define proportionality in times of defense: the ‘tit for tat’ and the ‘means-end’ parameters. The ‘tit for tat’ parameter suggests that defensive actions are permissible when the counterattack is proportionate to the initial attack. In contrast, the ‘means-end’ parameter focuses on completely deterring the attacker from the ability to launch further attacks, determining the legitimacy of a proportional counterattack based on the objective of using force. The utilization of systems like the Iron Dome aligns more closely with the ‘tit for tat’ approach, where defense matches the scale of the attack.

Proponents advocating for the complete prohibition of all forms of AWS may argue that DAWS could potentially be exploited as LAWS under the guise of self-defense. The lack of a universally agreed-upon definition for defensive weapons creates a vulnerability, allowing for the manipulation of international law principles and doctrines. However, this concern can be effectively addressed by establishing an international agreement that outlines the characteristics of DAWS. The international agreement could explicitly define the elements that categorize a weapon as a DAWS to enhance clarity and prevent misuse. Additionally, incorporating the ‘tit for tat’ parameter into the agreement would provide a specific criterion for assessing the legitimacy of an AWS in relation to its defensive or lethal nature. This criterion ensures that the evaluation of autonomous weapons aligns with the principle of proportionality, wherein the defensive response corresponds appropriately to the scale of the initial attack. By deliberately excluding the ‘means-end’ parameter from the assessment criteria, such an agreement would significantly reduce the potential for abuse of DAWS and uphold IHL principles.

The second fundamental concern revolves around the danger of reverse engineering. As Israeli Prime Minister Benjamin Netanyahu expressed on the Russo-Ukrainian war, “We’re concerned also with the possibility that [the Iron Dome] systems that we would give to Ukraine would fall into Iranian hands and could be reverse engineered.” He continued by adding that this is not a theoretical concern, as a similar case has happened previously with other anti-tank systems. The Iron Dome’s technologies are especially at a heightened risk for reverse engineering due to their high mobility nature. While this feature is an advantage for Israel to strategically place the weapon in densely populated areas, it means that it is also severely vulnerable to being captured. Beyond the concern of physical capture, as AI is also a highly adaptive technology, the other party can learn to continuously feed the system with false positives, which intentionally transforms DAWS into LAWS. In this scenario, the aggressor can use human shields and trick the AI into thinking that the ‘human baits’ are weapons to be attacked for defense.

Critics of DAWS may argue that even when adhering to a strict definition of DAWS to govern their permissibility, the inherent unpredictability of machine learning still introduces a great risk of reverse engineering. However, in the case where the adversary employs false positives to reverse engineer the DAWS, this issue can be overcome by continuous and close oversight from humans to evaluate the decisions carried out by the DAWS. Also, DAWS can incorporate mechanisms such as timers before taking actions to allow human intervention when it responds to false positives. While such a mechanism does not equate to MHC as it does not involve human decision in the firing process, it allows humans to override the system’s action when necessary. In addition to temporal safeguards, advanced physical and technical features can be embedded in DAWS to thwart potential misuse, particularly if the system is captured. These measures include a self-destruction feature, rendering the system inoperable if compromised. Moreover, incorporating custom-built proprietary hardware, which is not commercially available, adds complexity to reverse engineering attempts. Continuous code obfuscation, achieved through regularly updating the codebase with intricate modifications, makes understanding the system’s logic and functionality more challenging for those attempting to reverse engineer DAWS.

Reverse engineering also presents a unique legal issue surrounding the development of DAWS that is not present in the deployment of LAWS. By design, LAWS are made with the intention to attack, while DAWS are not. This distinction prompts a critical consideration regarding whether an act of reverse engineering can be categorized as an attack when the underlying intent to cause harm is absent. According to Article 8 of the Rome Statute of the International Criminal Court, intention, or mens rea, is an element of finding a war crime in an attack against civilians. In a reverse-engineered DAWS, the two parties’ responsibility for the attack becomes divided. The weapon user becomes accountable for the physical act of the offense, referred to as actus reus, while the party manipulating the system holds the mens rea element. So far, there is no international law governing reverse engineering. This dilemma poses another layer of complexity in AWS’s accountability.

Conclusion

Cutting-edge defensive technologies, particularly when integrated with AI, play an indispensable role in upholding humanitarian principles. However, our current global governance on AWS seems to overlook the promising potential of such technology despite the remarkable success evident with the Iron Dome. The L.56 Resolution stands as evidence of the denial of this potential, as it fails to acknowledge the crucial distinction between DAWS and LAWS. The Iron Dome’s pivotal role in safeguarding civilian lives is a testament to years of continuous development. Restricting the freedom to explore such technology further jeopardizes its promise to enhance civilian protection, as emphasized in the resolution’s preamble. While this article presents a diverse set of arguments justifying the use of DAWS, it is undeniable that further elaboration and detailed implementation are required. Beyond advocating for the promotion and protection of the lawful development of DAWS, comprehensive governance should encompass other essential aspects. This governance involves clarifying the definition of defense, establishing a legal foundation for cases of reverse engineering, and researching the possibility of further technical restrictions on DAWS.

Planned to conclude in a legally binding instrument by 2026, the UN is set to have the next provisional agenda on AWS next year. In the following forum, the UN plans to involve various parties to start taking action on the issue and revisit Resolution L.56 to develop it further. This article advocates for a strong and explicit recognition of the distinction between DAWS and LAWS within the UN General Assembly’s resolution on AWS. This recognition can be achieved by refining the legal and political language related to AWS, steering clear of the ambiguous use of the term “LAWS” in the current resolution. Additionally, this article emphasizes the imperative for separate legal instruments governing DAWS and LAWS to duly acknowledge their inherent differences in impacting human lives. While reaching international consensus on military and warfare-related laws remains a challenging endeavor, the adoption of soft laws by the UN to acknowledge the significance of DAWS can carry significant political influence. Such recognition can contribute to the promotion of a peaceful, legally sound, and ethically responsible.


*Rizky Citra Anugrah is an S.H. (LL.B.) Candidate at Universitas Gadjah Mada, specializing in international law. Rizky has received numerous awards from several international institutions for his proficiency in writing and researching within various aspects of international studies. As an undergraduate student, he actively engages in multiple international youth organizations, promoting multilateral cooperation through people-to-people diplomacy. The author is grateful for the guidance and support given by Mr. Haekal Al Asyari, S.H., LL.M., during the process of writing this article.


Cover image credit

“Extraterritorial Observance”: The Invisible Laws that Compete to Govern China’s  Belt and Road Loans

“Extraterritorial Observance”: The Invisible Laws that Compete to Govern China’s Belt and Road Loans

Michael Yip*

I. Introduction

In October 2023, two dozen countries gathered in Beijing to celebrate the Belt and Road Initiative’s (“BRI”) tenth anniversary. However, in ten years, little is understood about the bank loans that finance this initiative. On the one hand, the loans have been described as “debt traps” or “unsettling” projections of Chinese geo-economic power. On the other, the BRI has been characterized as an “international public good” or—in the words of the UAE’s Economy Minister—even “a gift to the world.” Naturally, both approaches—particularly when taken in isolation—are oversimplifications.

1. The Value of a Legal Perspective

Adopting a legal lens, however, would materially enrich our understanding of how BRI loans work in practical and empirical terms—enabling us to “look behind the headlines.” One aspect that has been overlooked is the “invisible law” that governs the loan agreement and disputes arising from the loan. Although this law—codified in the loan agreement’s choice of law, jurisdiction, and procedural law clauses—is an indispensable (albeit “boilerplate”) part of any banking contract nowadays, it has acquired an added significance in BRI loan documents. These clauses have become a venue in which different legal regimes—Chinese, English, New York, and others—project legal power and jostle with one another to shape China’s global development financing initiative (which itself goes on to project power and compete for prominence and acceptance in international affairs).

2. Key Findings

The data presented below shows that, based on the text of BRI loan agreements, Chinese law and dispute resolution mechanisms have been an increasingly popular choice. This indicates a characteristic of the BRI to induce “extraterritorial observance”: a shorthand term used by this article to describe the patterns and processes by which national laws are—as a matter of common and expected practice—observed by persons outside the country from which the laws originate. (In this case, Chinese law happens to be the object of extraterritorial observance, but history tells us that—because of processes such as globalization, migration, revolution, and colonialism—Soviet, Islamic, English, New York, and European Union laws have undergone a comparable experience.)

However, taking what the clauses in BRI loan agreements expressly say at face value would lose sight of the fact that they govern the loan in ways that cannot immediately be evident upon a cursory reading of the loan documentation. In other words, the governing laws have been—to a material extent—“invisible.” This is for three reasons. BRI loan agreements have often been kept secret; the depth, breadth, and content of the governing law have not been fully enunciated in the loan agreement; and some of the governing law may be found elsewhere in the laws of other countries.

3. Article Roadmap

This article will first explain the origins of the contest between legal regimes; describe the extraterritorial observance of Chinese law; and explain what makes the law governing BRI loans both consequential and invisible, before concluding thereafter.

These considerations are not merely academic. Indeed, when BRI projects go wrong, the “invisible law” determines how China and its borrowers will work out problems—on which, according to Christoph Nedopil, over a trillion dollars of taxpayers’ money, citizens’ livelihoods, and geo-economic power are staked.

II. Does a Competition Between Legal Regimes Exist?

At first glance, a competition between legal regimes may not appear to exist. After all, BRI loan agreements—and their clauses—constitute the final product of a negotiation and documentation process between the borrower and lender, supported by legal and financial advisers. Given this, any “competition” most visibly lies between the loan parties, rather than different legal regimes. This interpretation is supported by Ian Ivory and Cora Kang, who—in their book on the use of English law in BRI transactions—suggested that negotiations may be won or lost as part of a quid pro quo: “Where the question of using PRC law is sometimes raised, this is usually as a tool in negotiations and is traded for some other concession on the deal.”

However, the English judiciary and bar associations published a position paper titled: The Strength of English Law and the UK Jurisdiction. This paper advocated for the predictability of English law, claiming that it “respects the bargain struck by parties” and “will not imply, or introduce, terms into the parties’ bargain unless stringent conditions have been met.” Were disputes to arise, the paper also advocated for the UK’s “incorruptible judiciary” that was described as “structurally and practically independent.”

Those comments were made in 2017, attempting to provide reassurance and bolster confidence that—even after the UK’s departure from the European Union—English law was still suitable to govern cross-border contracts and English judges could still be trusted to adjudicate cases. Although the context of these comments, Brexit, is salient, they are just as applicable to the BRI—which at that point was still in its relative infancy (at four years old) and was, according to sentiment analysis conducted by Bruegel, better able to court interest in the West.

At the time, the judiciary’s and bar association’s comments also formed part of a broader set of advocacy messages by the UK state. They include 2016 remarks by the UK Advocate General for Scotland—a member of the executive branch—which emphasized the value of the UK’s law enforcement and legal services on the Belt and Road. In this light, both sets of comments can be cast as an example of one legal regime attempting to maintain its competitiveness in what Gilles Cuniberti called an “international market for contracts” and (by extension) for BRI loan agreements too. To those ends, there is no reason not to include initiatives such as the BRI as a plausible means to maintaining competitiveness in Cuniberti’s “market.”

By contrast, attempts by the Chinese legal regime to extend (rather than, in the English case, maintain) competitiveness have assumed a different form. Rather than an enticement-led approach (through position papers and other marketing campaigns), China’s approach has been directive-based and action-oriented. For example, the Opinions of the Supreme People’s Court on Further Providing Judicial Services and Guarantees by the People’s Courts for the Belt and Road Initiative stated that: “The people’s courts shall extend the influence of Chinese laws… and strengthen the understanding and trust of international businesses on Chinese laws.”

III. The Competition and “Extraterritorial Observance” in Numbers

To date, no attempt has been made to measure the contest between legal regimes to govern BRI loans. However, original analysis of AidData’s loan agreement repository undertaken by the author reveals the extent to which the BRI is inducing the extraterritorial observance of Chinese law.

1. Choice of Law Clauses

Choice of law clauses set out “the law that applies when interpreting the agreement and in determining any disputes regarding it.” A typical formulation of the clause can be found in the 2017 loan agreement signed between China and Sierra Leone that financed the upgrade and expansion of the Queen Elizabeth II Port, which reads as follows: “This Agreement and the rights and obligations of the parties hereunder shall, in all respects, be governed by and construed in accordance with the laws of China.”

Fig. 1a shows the composition of choice of law clauses occurring in 48 loan agreements entered into by Chinese banks and overseas borrowers following the inception of the BRI. As shown, Chinese law has emerged as the dominant choice by 2020 (71%). However, this observation runs contrary to common practice of selecting a choice of law originating from a third country. This practice has been described by Philip Wood in a 2016 book commemorating the Loan Market Association’s twentieth anniversary as important “not because of familiarity or commercial orientation or any of those soft virtues, but rather to ensure that the loan obligations were insulated against changes to the loan agreement by a statute of the sovereign.” Philip Wood went on to indicate that such changes could include passing legislation to “forcibly” impose a debt moratorium, a debt rescheduling or a foreign exchange control of the loan currency. The primacy of Chinese choice of law clauses, however, most likely reflects Matthew Erie’s and Sida Liu’s view that China, as a “capital exporter, may occupy a dominant bargaining position vis-à-vis the host state.

Fig. 1b shows the cumulative frequency of choice of law clauses in 101 Chinese-financed loans from 2003 to 2020. As shown, the adoption of Chinese choice of law clauses increased by 1.8 times from the BRI’s inception in 2013 onwards, whereas the same for English choice of law clauses grew by 1.5 times. This rate of adoption has meant that Chinese law clauses not only maintained but also enlarged their extraterritorial observance over time. English law clauses—the first-choice common law preference but nonetheless the second-choice overall—was unable to challenge Chinese law primacy, instead entering into a plateau that by 2020 had not yet been reversed.

2. Jurisdiction Clauses

Jurisdiction clauses “deal with the physical location of where a dispute will be heard, the type of institution (Court or Arbitration Tribunal) that will hear the dispute.” In practice, these clauses will often mimic choice of law clauses because, as Philip Wood noted in relation to syndicated loan agreements: “Once the governing law had been chosen, jurisdiction followed suit since the benefits of an external governing law might well be lost if the courts that enforced it were different, even though technically most courts could then, as now, apply foreign law.”

However, Chinese lending has produced noteworthy exceptions. In the pre-BRI era, an illustrative example is a RMB32 million loan provided by the Export-Import Bank of China (“China Eximbank”) to the Botswana Ministry of Finance and Development Planning for a housing project in the capital. In that loan agreement, the parties agreed upon an English governing law, but elected that disputes would be submitted to the China International Economic and Trade Arbitration Commission (“CIETAC”). In the AidData repository, other noteworthy hybrid combinations during the BRI era include a US$219 million loan provided by China Eximbank to the Philippine Department of Finance for the “Philippine National Railways South Long Haul Project.” In the loan agreement, Chinese governing law was chosen but the dispute resolution seat was the Singapore International Arbitration Centre.

Fig. 2a shows the composition of jurisdiction clauses, which have aggregated variants such as different physical locations for the same arbitration tribunal or alternative venues if an urgent decision is required. However, as with the case of choice of law clauses and irrespective of the permutations on offer, the preference for the Chinese option—CIETAC—has been dominant (56%). In transactions for which a jurisdiction clause was ascertainable, the London Court of International Arbitration and Hong Kong International Arbitration Centre were in close contention, respectively competing for second and third place.

Fig. 2b shows the cumulative frequency of jurisdiction clauses. As shown, the adoption and extraterritorial observance of Chinese jurisdiction clauses grew by 1.8 times from the BRI’s inception in 2013 onwards. This growth rate mirrors the rate for Chinese choice of law clauses (discussed above), which indicates that the “hybrid combinations” discussed above were outliers rather than the norm. Meanwhile, Hong Kong jurisdiction clauses grew by 1.5 times and those of London grew by 1.7 times.

3. Procedural Law Clauses

Procedural law clauses stipulate the rules by which the dispute resolution seat will administer the adjudication of the dispute. In practice, these clauses will often mimic jurisdiction clauses because—where national courts have been nominated—compliance with their procedures tends to be mandatory. For example, litigants in Chinese and English courts must follow the civil procedure rules for each country in order for their case to be tried. However, the rules of arbitration tribunals give an established right to choose and/or modify the procedural law governing their arbitration.

The “right to choice” in a BRI arbitration context is demonstrated by an US$85 million loan provided in 2010 by the CITIC Bank and China Construction Bank to the Argentinian Ministry of Economy and Public Finance to finance construction of and supplies to the Lina-A Metro in Buenos Aires. In that loan agreement, the Hong Kong International Arbitration Centre was given jurisdiction, but the procedural law chosen by the parties was that of the U.N. Commission on International Trade Law.

What both transactions show is that there is substantial flexibility in the contractual terms governing procedural law – but only where arbitration is concerned. Furthermore, no loan agreements substituted the procedural law of one national arbitration tribunal for those of another national arbitration tribunal. No transaction, for example, gave jurisdiction to the London Court of International Arbitration but chose the procedural law of a Chinese arbitration tribunal. Instead, where substitutions have occurred, they have swapped the procedural law of a national tribunal with multilateral procedural law formulated by an international organization.

Fig. 3a shows the composition of procedural law clauses. As with the choice of law and jurisdiction clauses, the preference for the Chinese option—the rules of CIETAC—has been dominant (54%). Fig. 3b shows the cumulative frequency of procedural law clauses. As shown, the adoption and extraterritorial observance of Chinese procedural law clauses grew by 1.8 times from the BRI’s inception in 2013 onwards.

IV. The Laws are Consequential but Operate “Invisibly”

1. On Consequentiality

The laws described above are consequential in three ways. First, they serve as a gateway for troubled transactions and parties in dispute to seek support from judges and arbitrators on contested points of law. As the BRI matures and moves into its second decade, loan transactions will enter rougher waters and the three clauses discussed will come to the fore—especially as China is pushing to play a more active dispute resolution role in the international legal order through the China International Commercial Court. Doing so enables China to place less reliance on resolving problems through ad-hoc diplomatic channels, as was recently seen when Zambia restructured US$4.1 billion of debt owed to China.

Second, the clauses serve as conduits for extraterritorial observance and channel the legal power that countries exert on each other. The impact of these clauses is at their most pervasive when individual jurisdictions (such as England, New York and—increasingly—China) shape the international legal order to induce others from overseas to voluntarily observe their laws or, alternatively, their approach to the practice of law. For instance, the English jurisdiction, through its Loan Market Association, promulgates standard-form loan agreements—that have often been English law-governed – to lenders and borrowers of all origins. So, in a similar vein, could a standard-form template for BRI loans materialize one day? Possibly. In their landmark work How China Lends, Anna Gelpen et. al. have already identified emergent patterns in clauses covering events of default, confidentiality duties and repayment mechanisms across 100 Chinese loan agreements. However, notwithstanding that those patterns are—in their 2024 form—unlikely to constitute a self-standing BRI template, templates materialize slowly. By way of illustration, Philip Wood recollected that the first syndicated loan agreement governed by English law may have drafted in 1968. Since then, it has accumulated nearly 60 years of updates and modifications. Building a template takes time. Let us wait and see.

Third, the clauses—and their propensity to nominate one choice of law or jurisdiction to the exclusion of others—drive and divert significant amounts of business for law firms. Over a longer time horizon, the BRI may go on to bring many millions of dollars of business to the law firms with the capability to advise on Chinese law matters. These law firms include both “home-grown” Chinese firms as well as international outfits that have entered into joint ventures with Chinese partners.

2. On “Invisibility”

Yet, the law governing BRI loan agreements operates invisibly and in ways that a mere examination of the documents would not reveal. It does so in three ways. First, as Anna Gelpern et. al. have discovered, BRI loan agreements contain “far-reaching” confidentiality clauses that restrict the borrower’s ability to disclose information about the loan. (This differs with commercial practice, in which it is typically lenders who have been prevented from disclosing confidential information, primarily to uphold borrower privacy.)

Second, the content of the law and the situation-specific rules governing BRI agreements will not be fully enunciated in the three clauses. The clauses cannot (and simply do not have the space to) articulate the legal rule for a complete universe of legal problems that may arise in relation to the loan. Accordingly, at best, the clauses serve as signposts to very large bodies of law, which in turn require further expertise to understand and apply. (Furthermore, the varying levels of comprehensiveness and depth of codification within the Chinese, English and other legal systems will not only add further complexity to ascertaining the proper legal rule, but also subject that ascertainment to interpretation and/or modification by judges.) In this sense, the governing law of a BRI loan may not only be invisible to the reader of loan agreement, but also uncertain.

Third, although parties to a BRI loan generally have the autonomy to select their own choice of law, this may be (or attempt to be) overridden by a foreign mandatory law that is “unseen” and on which the text of the loan agreement was silent. For example, in the case of loans governed by Chinese law and involving a private borrower, plausible mandatory laws—as noted in 2022 by Philip Wood—most likely include the borrower country’s insolvency laws. These could conflict with a Chinese governing law expressly chosen by the parties if the borrower entity became insolvent and claims on borrower assets were made by creditors. (The same, however, would not apply to sovereign borrowers who would instead be caught between an expressly-chosen Chinese governing law and soft international obligations such as Paris Club rules.) Elsewhere, a similar (albeit more indirect) example arises in the field of environmental law. A borrower country’s planning and environmental laws would apply to government licences which, in turn, would be required to develop a site into a project and which would typically be listed as part of conditions precedent to the loan being drawn down by the borrower. Finally, with respect to loans governed by a non-Chinese law, plausible sources of mandatory Chinese law include the social public interest” exception to party autonomy. Given that mandatory laws of any jurisdiction present a “hidden minefield” to BRI parties, their advisers would do well to acquaint themselves with Chinese and non-Chinese approaches to conflict of laws.

V. Conclusion

There is a contest between legal regimes to be attractive and to—wherever and whenever possible—be taken up and observed by international commercial parties. This contest has long predated the BRI. However, the loan agreements underpinning China’s initiative serve as a new arena for contestation in which a new alternative—China’s laws and dispute resolution mechanisms—show early signs of taking primacy over more established alternatives from North America and Europe. The consequences of this “extraterritorial observance” are significant: a legal regime’s entrenchment and prominence in transactions tends to sustain itself, by setting the norm for future transactions and/or by governing the forthcoming disputes. In turn, extraterritorial observance precipitates more business activity for its lawyers. For practitioners, this can indeed be a virtuous cycle.

However, the laws governing BRI loans operate invisibly. As has been the case with any complicated transaction pre-dating the BRI, it may be difficult to ascertain which loans are governed by which laws; which doctrines of expressly-chosen laws apply; and how local laws may mandatorily override the choice of the parties. One day, these laws could be called upon to determine the outcome of the very first BRI banking dispute. Such a dispute will plausibly place billions of dollars at risk; materially shape the direction of BRI lending practices; and bring about the collision of law against another. For these reasons, how invisible laws govern bank loans on the “Belt and Road” deserve an ever-watchful eye.


*Michael Yip is a Research Associate in “China, Law and Development” at the University of Oxford, where he is also the Research Cluster Lead for legal services. Previously, he was a British civil servant and worked at the World Bank’s Legal Vice Presidency, specialising in export and infrastructure finance. Michael also holds an LLM as a Yenching Scholar from Peking University in China.


Cover image credit

The Butterfly Effect in Investment Arbitration: How Russia’s and Norway’s Actions Concerning Snow Crab Fishing May Open an Avenue for Foreign Investors to Bring an Action Against Spain

The Butterfly Effect in Investment Arbitration: How Russia’s and Norway’s Actions Concerning Snow Crab Fishing May Open an Avenue for Foreign Investors to Bring an Action Against Spain

Danilo Ruggero Di Bella*

Introduction

This piece traces the possible ramifications of third-party states’ actions in the context of investment arbitration. It explains how a third state’s action may have a “butterfly effect”: the third state’s action can prompt foreign investors to initiate investment arbitrations against host states different from the third-party state that carried out the action in the first place. Although to a certain degree, this is not a new phenomenon (multiple investment arbitrations have been triggered by the E.U. Commission urging the repeal of various state aids), it is certainly a rarer occurrence outside of an international organization. Within an international organization, it is relatively easier for the institutional governing body to direct its member states to commit a breach of their international obligations. For example, in Micula v. Romania, the host state breached its obligations towards foreign investors by repealing incentives that could have constituted illegal state aid in the eyes of the E.U. Commission.

Indeed, sometimes, third-party states’ or international organizations’ actions may prompt foreign investors to initiate arbitrations against their host state for a measure that the host state took in response to the initial third-party’s action. At times, unfortunately for the host state, this measure translates into a breach of an obligation the host state owed towards its foreign investors. Hence, a sort of butterfly effect takes shape.

The critical actions that will be discussed are Russia’s characterization of snow crabs as a sedentary species and Norway’s conflicting interpretation of a multilateral treaty, the 1920 Svalbard Treaty (originally known as ‘Spitsbergen Treaty’ after the name given by the Dutch explorer Willem Barentsz to the archipelago). These actions may have triggered a chain reaction of events bearing legal implications for Spain, due to Spain’s violations of its international obligations towards its foreign investors catching snow crabs around the Svalbard archipelago based on Spanish fishing permits.

First, this piece will provide a brief overview of the snow crab industry and its origins. Second, it will discuss Russia and Norway’s controversial stance on the snow crabs. Third, it will explain the inconsistency of Norway’s isolated view of the 1920 treaty regulating the status of Svalbard. Finally, it will illustrate the potential investment arbitrations that can be filed against Spain for revoking the snow crab-catching permits for Svalbard from its foreign investors.

I. The E.U. Snow Crab Fleet

In 2012, E.U. trawlers began harvesting snow crabs, a relatively new species in Europe’s waters. This novel activity is a highly profitable business (reportedly, each snow-crab trawler yields one million euros per month on average), and arguably an environmentally friendly practice. Indeed, snow crabs are infesting Europe’s waters, since they are a non-indigenous species (p.6) migrating from the Russian coast where they were artificially introduced in the 1960s. Being an alien species prone to overbreeding, they end up harming the ecosystem if they are not regularly caught.

The European Commission has been authorizing a few member states—specifically, Spain (ANNEX IB p. 99), Estonia, Lithuania, Latvia, and Poland (ANNEX III p. 149)—to issue permits to catch snow crabs. A trawler flying the Spanish flag—the Adexe Primero—pioneered the catch of snow crabs in Europe in 2012. The Spanish vessel focused its activities in the “Loophole” area, a small portion of international waters between Norway and Russia in the Barents Sea, and the waters surrounding the Svalbard archipelago. This vessel carried out its activities on the ground of the fishing permits issued by Spain, specifically, a Northeast Atlantic Fisheries Commission (“NEAFC”) zone permit for the Loophole area and a Svalbard Zone permit for Svalbard waters.

Vessels of the contracting parties to the NEAFC can get a permit from their flag state to freely catch unregulated stocks—such as snow crabs—in international waters (like in the Loophole area). Similarly, vessels of the signatories to the 1920 Svalbard Treaty can get a permit from their respective flag States to fish around Svalbard on the same footing as Norwegians. Both of Adexe Primero’s fishing grounds proved to be so profitable that other E.U. and Norwegian vessels followed suit.

II. Crimea Sanctions and Russia’s View on Snow Crabs

Following EU sanctions on Russia for the 2014 annexation of Crimea, Russia retaliated by obstructing E.U. vessels fishing in the Barents Sea. For instance, on 16 July 2015, the Adexe Primero was seized by a Russian patrol boat while fishing in international waters in the Barents Sea (as proved by the satellite-based vessel monitoring system onboard). The seizure was prompted by the detection of fishing pots with foreign signs in Russia’s Exclusive Economic Zone (“EEZ”). The pots belonged to the Adexe Primero and to a Norwegian vessel (the Northeastern H-27-AV). It turned out that the pots had drifted on the current into Russia’s EEZ. The Spanish vessel was then released after posting a bond.

In July 2015, Russia’s retaliations built up to a declaration that defined snow crabs—usually fished by E.U. vessels in the international waters of the Loophole—as a sedentary species living on the continental shelf (p. 339). As such, the exploitation of this valuable resource should be up to the coastal states, i.e., Russia and Norway, the latter of which joined Russia’s declaration.

The Loophole in the Barents Sea is located in international waters, as Russia’s and Norway’s EEZ cannot extend further than 200 nautical miles out to the sea (the Loophole is squeezed between the two EEZs).  However, the continental shelf can extend up to 350 nautical miles as per Article 76 UNCLOS, thus engulfing the seabed underneath the Loophole. Therefore, the continental shelf below the water column in the Loophole can be subject to Russia’s and Norway’s jurisdiction, despite the water column above being on international waters. By defining the snow crab as a resource of the continental shelf (instead of a high-seas fishery resource), the coastal states (Russia and Norway) gain otherwise nonexistent jurisdiction over this precious resource and the right to exploit it exclusively, while simultaneously eroding one of the freedoms of the high seas, the freedom of fishing under Articles 87 and 116 UNCLOS.

Interestingly, the characterization of crabs as a sedentary species is not univocal and is rather arbitrary, often driven by national economic interests. Japan (a traditionally distant-water fishing country) considers crabs as a high seas fishery resource. Arguably, crabs’ ability to migrate defies their sedentary feature. Other states—mostly, coastal states (such as Canada (p.14))—hold that this crustacean is a sedentary species. It remains unclear whether crabs are sedentary or high-seas species. For example, Brazil considers lobsters sedentary, whereas the UK does not (p. 9).  Accordingly, the classification of crustaceans is often a contentious issue.

Following Russia and Norway’s joint declaration, in August 2015, the E.U. recommended that its member states suspend the permits to catch snow crabs in the Loophole. Accordingly, Spain suspended Adexe Primero’s permit to fish in the NEAFC zone. According to the accounts of the E.U. shipowners and captains involved, other E.U. member states instead disregarded the E.U.’s recommendation and allowed their trawlers to keep fishing in the Loophole. Finally, in September 2015, Spain followed the example of the other member states and lifted the suspension of Adexe Primero’s permit for the NEAFC zone. Spain then renewed Adexe Primero’s permit for 2016. However, in March 2016, Spain suspended the permit for the NEAFC zone once again and eventually stopped issuing it altogether, apparently out of deference to Russia’s stance.

III. Norway’s Breaches of International Legal Obligations

The 1920 Svalbard Treaty governs the international status of the Svalbard archipelago. Just a year earlier, in 1919, the geographer and explorer Robert Neal Rudmose-Brown described the archipelago as a no man’s land whose natural resources have been explored and exploited by a variety of states since its discovery. In the aftermath of World War I, the need to establish some sort of local authority to administer the international community living on the archipelago and to avoid the archipelago’s militarization led to the negotiations of the Svalbard Treaty.

The contracting parties to the Svalbard Treaty gave Norway sovereignty over Svalbard but allowed the joint and peaceful exploitation of the archipelago’s natural resources by a variety of nations. The Treaty accords to the nationals of each contracting state the right of economic activity on an entirely equal footing (p. 128) with Norwegian nationals, thus preserving (p.2) the terra nullius status of the region (specifically based on Articles 2, 3, 6, and 7). By virtue of this Treaty, Svalbard became the only land state territory of common use (p.IV) in modern international law.

However, over time, Norway has discriminatorily restricted the commercial access of the other signatories’ citizens based on nationality requirements. Meanwhile, Norway has disavowed the Svalbard Treaty by depriving its provisions of their original meaning: to constrain Norway’s sovereignty over the archipelago in favor of the international community’s acquired rights. Norway has also relied on the Treaty to extend unrestrained sovereignty on the waters surrounding Svalbard up to 200 nautical miles and, accordingly, to expand its maritime boundaries bordering Greenland.

Thus, Norway inconsistently interprets the geographical scope of the Treaty: on the one hand, Norway holds that the Svalbard Treaty applies only up to 12 nautical miles off the archipelago; on the other hand, Norway stretches its maritime boundaries with Greenland up to 200 nautical miles off Svalbard by relying on the same treaty notwithstanding the fact that, according to Norway’s own interpretation of the Treaty, Norway’s sovereignty over Svalbard should be constrained to 12 nautical miles around the archipelago.

Russia and the EU object to Norway’s interpretation of the Treaty (as every other contracting party does), since if it was not for the Svalbard Treaty, Norway could not set its border at 200 nautical miles off Svalbard. Hence, either the Svalbard Treaty applies up to 200 nautical miles off Svalbard and Norway retains its current maritime border with Greenland, or the Treaty applies up to 12 nautical miles and Norway’s maritime borders (as well as its territorial jurisdiction) should be downsized accordingly.

Should the territorial scope of application of the Treaty be up to 12 nautical miles off Svalbard’s baseline, the portion of water between its outer edge and Greenland’s EEZ would be considered high seas. Should Svalbard’s continental shelf stretch further than 12 nautical miles into the high seas, the Svalbard Treaty would apply to that zone anyway, since the continental shelf is a prolongation of Svalbard’s land territory.

Therefore, regardless of the geographical scope of the Svalbard Treaty (either up to 12 or 200 nautical miles), this instrument should apply to the activity of snow crab fishing around Svalbard, because such activities occur on its continental shelf. Norway indeed considered snow crabs as a resource of the continental shelf in its 2015 joint declaration with Russia. Accordingly, the nationals of all contracting parties to the Svalbard Treaty should be allowed to catch snow crabs on Svalbard’s continental shelf just as Norwegians do.

Norway’s 2015 joint declaration with Russia concerning the sedentary nature of snow crabs might have seemed beneficial at the time to gain jurisdiction over this natural resource on the continental shelf underneath the Loophole. However, the same declaration backfires with respect to Norway’s interests in Svalbard. Indeed, the declaration indirectly obligates Norway to accord equal commercial rights to foreign snow crab trawlers on Svalbard’s continental shelf which, being a prolongation of Svalbard’s land territory, is covered by the application of the Svalbard Treaty. In other words, under Norway’s own interpretation of the Svalbard Treaty, E.U. trawlers should be able to harvest snow crabs on Svalbard’s continental shelf for the same reason they cannot catch them in the Loophole area. Of course, this is an unintended consequence of Norway’s policies on the two bodies of water (the Loophole and the Svalbard waters). The common denominator of the two policies is that they are both driven by national interest: both seek to let only Norwegians exploit snow crabs.

In June 2013, the Adexe Primero began fishing in Svalbard waters thanks to a permit granted by Spain based on the Svalbard Treaty. However, following Norway’s arrest of a couple of E.U. trawlers, in January 2017, Spain suspended the permit indefinitely, despite the EU’s recommendation to disregard Norway’s prohibition to catch snow crabs around Svalbard. Spain was indeed the only E.U. member state to adopt such a suspension (unlike Estonia, Lithuania, Latvia, and Poland). Initially, Span’s suspension was meant to be only temporally. However, it became a de facto revocation of the permit, as the suspension was never lifted.

Norway’s discriminatory actions have already led to investment arbitrations concerning the catching of snow crabs in Svalbard waters. Could Norway’s flawed interpretation of the Svalbard Treaty lead to similar repercussions for other states?

IV. Are Investment Arbitrations Drifting Towards Spain?

As noted, the E.U. member states who were granted snow crab catching permits by the E.U. reacted in different ways to Russia and Norway. On one hand, Estonia, Lithuania, Latvia, and Poland stood firm on their position and kept allowing their vessels to catch snow crabs in the Loophole and around Svalbard. On the other hand, Spain had repeatedly suspended Adexe Primero’s permits and, eventually, stopped issuing them altogether out of fear of Russia and Norway. Thus, Russia’s erosion of the freedom of fishing in the high seas (by defining snow crabs as a resource of the continental shelf) and Norway’s violation of the Svalbard Treaty may have led Spain to breach in turn its international obligations towards its foreign investors.

Spain’s repeated suspensions of the snow crab catching permits and their ultimate revocation have disrupted the activity of the Adexe Primero and its shipowner, Mariscos Polar SL, a company registered in Spain for the purpose of fishing snow crabs in arctic waters and whose shareholders hold Moldovan and Russian nationalities.[1] These Russian and Moldavian investors may invoke respectively the Spain-Russia Bilateral Investment Treaty (“BIT”) and the Spain-Moldova BIT to bring an expropriation claim against Spain. Spain directly expropriated the snow crab-catching permits and indirectly expropriated the foreign investors’ company operating thanks to those permits. Furthermore, the cumulative effects of the continual suspensions of the permits—culminating with their revocation—may well amount to a creeping expropriation.

Spain’s consequential expropriation of Mariscos Polar is worsened by the fact that the actions leading to this taking were not proportional. First, there was a lack of proportionality since Spain did not provide alternative fishing grounds to avoid the total disruption of Mariscos Polar’s business.[2] Second, the absence of proportionality is highlighted by the fact that Spain was the only E.U. member state to adopt such a harsh measure. Hence, even if Spain’s drastic actions may have been taken because of Russia and Norway, their lack of proportionality and compensation does not exempt Spain from its international obligations towards its foreign investors. Importantly, Article 6 of the Spain-Russia BIT and Article 5 of the Spain-Moldova BIT cover not only direct expropriations but also any other measures with similar effects.” Hence, the applicable BITs allow for indirect and creeping expropriation claims.

Since fisheries are governed by an E.U. Common Policy, the treatment Spain accorded to Mariscos Polar should be contrasted against the treatment that other E.U. member states in the same position as Spain accorded to enterprises operating in the same sector as Mariscos Polar. If such treatment is more favorable than the one accorded by Spain, then Spain failed to accord Mariscos Polar the most favorable treatment it could have possibly accorded. Since the other E.U. Member-States did not suspend their snow crab permits, Spain breached the most favored nation (“MFN”) clause in Article 5(2) of the Spain-Russia BIT and Article 4 of the Spain-Moldova BIT.

Further, a Russian investor bringing a claim under the Spain-Russia BIT could also rely on the MFN clause to broaden the scope of the dispute resolution clause. This way, the investor may bring fair and equitable treatment (“FET”) and full protection and security (“FPS”) claims. For example, the investor may import the more favorable treatment accorded by the Spain-Lebanon BIT, whose dispute resolution clause extends also to violations other than unlawful expropriations. Whereas the Moldovan investor would not need to invoke the MFN clause for this purpose, since the dispute resolution provision of the Spain-Moldova BIT is not limited to expropriation claims.

Spain breached the FET standard towards its foreign investors insofar as it failed to protect their legitimate expectations concerning their investment, by generating an uncertain legal framework for catching snow crabs. Notably, the investors’ legitimate expectations were also backed up by the E.U.’s recommendation to ignore Norway’s prohibition of fishing in Svalbard.

Moreover, Spain failed to accord adequate legal protection against Norway’s subsequent claims to the fishing rights that Spain granted to its investors in the first place. Spain could have protected such rights by resorting to an international arbitration against Norway based on the 1929 Spain-Norway Treaty on Conciliation, Judicial Settlement and Arbitration. Not only did Spain fail to accord appropriate legal protection to her foreign investors to ensure the normal ability of their business to function, but it also deprived the investors of the title (viz. the fishing permit) to advance a possible investment claim against Norway (by invoking the Russia-Norway BIT).

Accordingly, the foreign investors may claim from Spain compensation for the damages suffered, the restitutio in integrum of the revoked permits, and their adequate legal protection through an international legal proceeding between Spain and Norway.

Conclusion

The snow crab affair illustrates how third-state actions may have a butterfly effect on the host state in international investment law. This is especially likely where the initial actions were ill-grounded and driven purely by national interests and the host state’s response did not take into proper consideration its international obligations towards its foreign investors. Crucially, should Spain disregard the interests of its foreign investors concerning the fishing of snow crabs in Svalbard waters, Spain would implicitly waive its international rights stemming from the 1920 Svalbard Treaty. Those rights include all maritime, industrial, mining, and commercial rights over the natural resources of the Svalbard archipelago. Thus, in the future, Norway may validly rely on Spain’s acquiescence to relinquish such rights—as per article 31(3)(b) of the VCLT—to prevent Spain from benefitting of Svalbard natural resources on an equal footing.


*Danilo Ruggero Di Bella is an attorney-at-law – member of the Madrid Bar and the Canadian Institute for International Law Expertise (CIFILE) – leading the law firm Bottega DI BELLA (www.bottegadibella.com). He holds a Master in Lawyering from Alicante University and an LLM in Investment Treaty Arbitration from Uppsala University. Danilo graduated in Law from Florence University with a specialization in public international law from Radboud University Nijmegen. He can be reached at: danilo.dibella@bottegadibella.com.

[1] Author interview with owners of Mariscos Polar SL.

[2] Author interview with owners of Mariscos Polar SL.


Cover image credit