About the Authors:
Ashutosh Anand is an undergraduate law student at the National University of Study and Research in Law, Ranchi, India. He can be reached at ashutosh.anand@nusrlranchi.ac.in.
Kaustubh Kumar is an undergraduate law student at the National University of Study and Research in Law, Ranchi, India. He can be reached at kaustubh.kumar@nusrlranchi.ac.in.
Image by Kevin Schmid available here.
Introduction
Since the beginning of the Russia-Ukraine war, investors have strongly felt the need for remedies offered by international investment arbitration in light of the injury and vulnerability to their investments in Ukraine. Considering this, claims for material damage compensation are a common component in every dispute of investment arbitration. Tribunals comprehensively deal with such claims but do not provide much heed to another type of damages, i.e., moral damages. Moral damages, or non-material damages, are awarded to remedy the non-material injury, such as individual suffering or agony, loss of loved ones, or personal aspersion concerning an incursion upon one’s home or private life. The claims for moral damages in investment arbitration are relatively recent, but their significance and frequency have grown in recent years.
Moral damages in international investment arbitration can play a decisive role in the recent Russia-Ukraine war. Formerly, during the Crimean invasion in 2014, Ukraine’s lawfare response through investment law to the Russian incursion presented an instructive and unique case study of the systematic use of legal means against a belligerent State, and the same could not be a far-flung expectation in the current war. Therefore, it becomes essential to discuss some ambiguous aspects of moral damages.
One such ambiguity arises when the legal entity claims moral damages on psychological or emotional grounds. It is a settled law that a legal entity can only suffer from reputational harm, as it is erroneous to deduce that a legal entity can bear any psychological violence or emotional distress. However, some tribunals, going contrary to the general rule, have granted the legal person, i.e., the entity, the claim for reparation of moral damages based on psychological violence or emotional distress, which was endured by the entity’s employees. This has resulted in a discrepancy in law.
With the primary objective of examining whether a legal entity/corporation can claim moral damages based on psychological or humane causes, this piece begins by analysing the present legal regime related to moral damages from the gargantuan lens of international investment law. Then, the piece sheds light upon the general rule concerning a corporation’s claim for moral damages on a psychological basis. Additionally, the piece analyses the Desert Line v. Republic of Yemen case, which has constructed an innovative jurisprudence on this issue. Towards the end, the piece argues for the flexible approach of the inclusion of humane causes for a legal entity’s claim, which is best suited to meet the ends of justice.
Moral Damages and the Current Legal Regime
Compensation of moral damages originates from the obligation under customary international law of full reparation, whether material or moral, of an injury created by an internationally wrongful act. Article 31(1) of the International Law Commission Draft articles on Responsibility of States for Internationally Wrongful Acts, 2001 [hereinafter “ILC provisions”], mentions the expression “full reparation.” Further, Article 32(2) of the ILC provisions state, “injury includes any damage, whether material or moral….” Moral damages may remedy multifarious non-material harm in investment arbitration, including damages to reputation and personality, as well as loss of business credit, reputation, goodwill, and opportunities in the case of legal entities and corporations.
Although certain tribunals have acknowledged moral damages as a potentially legitimate basis for recovery under international law, awarding moral damages in international investment disputes is still relatively uncommon. Tribunals are usually cautious of claims of moral damages, strictly examining the grounds for awarding the damages and capping the amount granted . Nevertheless, some Tribunals have considered granting moral damages to the aggrieved parties, including legal entities, by relying on certain tests, such as award under ex æquo et bono competence, exceptional circumstances test, and malicious and fault-based conduct of the state test.
Moreover, reiterating the foregoing ILC provisions, a plethora of ICSID Tribunals, in addition to Tribunals of other jurisdictions, have frequently provided that there is no provision in ICSID Convention, Arbitration Rules, and Additional Facility that bars the Tribunal from awarding moral damages, and that international arbitration tribunals are fully competent to award compensation for moral damages. Accordingly, it is irrefutable that reparations based on individual pain and suffering are valid claims that fall under the category of moral damages.
Psychological Damage: Deciphering General Rule Regarding Moral Damages
An individual may experience psychological violence, emotional distress, or any other suffering of that nature. Nevertheless, by applying common reasoning, it can be surmised that a legal person cannot have such a privilege. As a result, moral damages such as mental harm or emotional distress cannot be claimed by a legal person. However, if the investor is an individual who is protected under the investment treaty, that person may, indeed, experience mental distress or psychological abuse and hence be eligible to claim compensation.
Another exception to this general rule is the incorporation of the “Full Protection and Security” clause (hereinafter “FPS”) in the agreement. The FPS clause is the relevant instrument that empowers the corporation to claim such damages in front of an arbitral tribunal. The host State has a responsibility under the ‘FPS standard’ to (i) not harm investors/investments by the actions of State organs or actions otherwise attributable to the State and (ii) protect investments and investors from private parties during times such as civil unrest. Therefore, under the presence of the FPS clause, an entity can claim damages on behalf of its employees on physiological and moral grounds.
Desert Line Dictum: Going Away from the General Rule
Although the general rule of moral damages favors the law that a corporation cannot claim moral damages by citing psychological distress, the Desert Line v. Yemen case offered a novel perspective to the issue. It is one of the first and landmark cases concerning moral damages. In this case, the Claimant-Corporation claimed the amount as moral damages under three heads: breach of the obligations under the investment treaty by the Respondent, psychological violence suffered by the corporation’s executives, and loss of reputation suffered by the corporation.
The Tribunal accepted that moral damages were available to both legal and natural persons due to the harm resulting from the violation of an investment treaty. The Tribunal awarded moral damages based upon the loss of reputation of the Claimants. However, upon closer examination of the argumentation leading to the conclusion of reputational harm, it becomes evident that the Claimant contended that its executives faced anxiety and stress of being threatened, harassed and detained by both the Respondent-State and the armed tribes as well. The Claimant’s executives were also alarmed by the Respondent-State with respect to the Contracts. As a consequence, the Claimant has suffered a considerable injury to its credit and reputation. The strength of the argument was based on the individual pain and suffering of the employees.
Consequently, the Tribunal awarded the Claimant US$ 1,000,000, recognizing that the Claimant’s “prejudice was substantial since it affected the physical health of the Claimant’s executives and the Claimant’s credit and reputation.” While taking into consideration the lines produced above from Desert Line, it is noteworthy that the Tribunal not only described the loss to the company (credit, reputation and prestige) but also mentioned the harm to the company’s executives as primary to its reasoning in favor of moral damages. Therefore, it can be asserted that the Tribunal upheld the principle that a corporation can claim damages based on the actions that harmed members of its staff.
Way Forward: A Strict Application of Rules Appear Strenuous to Justice
Despite being contrary to the general rule, the Desert Line decision has been applied by multiple Tribunals in determining whether a corporation can claim psychological damages. However, it is pertinent to note that the Desert Line Tribunal failed to provide the rationale for its reasoning connecting the psychological violence suffered by the executives of the corporation to reputational harm, which led to the award of moral damages to the Claimant-Corporation. A more detailed explanation in this regard would have bolstered the precedential value of the decision.
Nevertheless, going along with the rigorous application of the standing rules precludes compensation to the corporation for damage to the personal rights of the executives. Such an approach might result in practical difficulties. For instance, if these harms are excluded, and the appropriate place for filing such a suit would be local courts, in the words of scholars like Dr. Sabahi (Sabahi 2011, 139-140) and Dr. Dumberry (Dumberry 2010, 247), these courts might be unable to manage the case with the degree of independence as desired or provide justice to the aggrieved party. Multiple ICSID Tribunals have endorsed this view.
To remedy this legal limitation, one could refer to the state espousal doctrine, which is dictated by the Vattelian fiction that an individual’s injury is equal to the home state’s injury of the individual, to envisage a doctrine of ‘corporate espousal,’ through which injury to an employee of a corporation would be regarded as injury to the corporation itself. This is the underlying premise from which the right to claim moral damages arises and can be employed in disputes arising out of the recent Russia-Ukraine war.