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CASE NOTE
INVESTMENT LAW AT THE INTERNATIONAL COURT OF JUSTICE: CERTAIN IRANIAN ASSETS (ISLAMIC REPUBLIC OF IRAN V UNITED STATES OF AMERICA)
JARROD HEPBURN[*]
CONTENTS
The field of international investment law has seen rapid development in recent decades, largely due to the mass of arbitration proceedings filed by investor‑claimants against states under bilateral and multilateral investment treaties. Investor–state arbitration tribunals have engaged in extensive debates over the meaning of the key substantive protections offered to investors in those treaties and have also contributed to the jurisprudence on international legal procedure.[1]
This rapid development has been assisted in certain respects by the case law of the International Court of Justice (‘ICJ’ or ‘Court’) and its predecessor, the Permanent Court of International Justice (‘PCIJ’). In particular, the discussion of reparations for breaches of international law in the 1928 Factory at Chorzów decision, the discussion of corporate nationality in the 1970 Barcelona Traction, Light and Power Company (‘Barcelona Traction’) decision and the definition of arbitrariness in the 1989 Elettronica Sicula SpA (ELSI) (‘ELSI’) decision have featured frequently in the awards of investment tribunals.[2] But the Court itself has ‘rarely been called upon to deal with investment issues’,[3] even during its current era of unprecedented activity. The closest that the Court has come in recent years was the Ahmadou Sadio Diallo (‘Diallo’) case, which addressed questions including expropriation of shareholders’ rights and the corporate veil.[4] Even in Diallo, however, the Court was reluctant to engage with investment law, and ultimately found violations only of certain human rights protections.[5]
Against this background, the case of Certain Iranian Assets (Islamic Republic of Iran v United States of America) (‘Certain Iranian Assets’) was the first in decades in which the Court was squarely presented with the questions of the treatment of foreign economic entities that are at the heart of modern investment law.[6] As such, observers might have expected (or at least hoped) that the Court would take the chance to offer its authoritative view on some of the central controversies of the field. Ultimately, however, the Court’s merits judgment of 30 March 2023 makes only a relatively modest contribution to international investment law, and the overall lack of clarity in the Delphic judgment lessens the future significance of even that modest contribution. Instead, central debates in the field remain to be resolved elsewhere.
This note summarises the Court’s merits judgment (Part II), before examining the Court’s reasoning on several of the main protections usually available to investors under international investment law — namely, fair and equitable treatment, denial of justice, and expropriation (Part III). The possible consequences of the judgment for the use of proportionality in investment law are then addressed (Part IV) as well as the role of several issues of defences — their characterisation as justifications or excuses, the countermeasures defence, and the ‘clean hands’ doctrine — in the proceedings (Part V).
In 1983, a bombing at a United States military base in Lebanon killed 241 US nationals. The US viewed Iran as responsible for the bombing, as well as later events including a 1996 attack on a housing complex in Saudi Arabia, which killed a further 19 US nationals.[7] In 1984, the US designated Iran as a ‘state sponsor of terrorism’ under US law.[8] Under a 1996 law, all such terrorist-designated states were stripped, for certain claims, of the immunity before US courts that foreign states would normally enjoy under customary international law.[9] The families of the 1983 bombing victims, and other groups, then began bringing claims against Iran in US courts seeking compensation for the deaths.[10] Amongst other cases, this led to a ruling in Peterson v Iran for USD2.6 billion in favour of the 1983 bombing victims.[11] Following further legislative changes in 2002, 2008 and 2012, US law began to allow successful claimants in these domestic cases to enforce the rulings against assets of Iranian state-owned entities held in the US.[12] In 2012, the US President also issued an executive order blocking all Iranian state assets within the US.[13] As a result, US courts began applying these legislative and executive measures to issue orders for the attachment and execution of Iranian assets for distribution to the Peterson judgment creditors and others.[14] Alongside the assets of other Iranian state-owned commercial banks, the various US measures reached in particular the assets of Bank Markazi, the central bank of Iran, which held around USD1.8 billion in a Citibank account in New York.[15]
Bank Markazi challenged the constitutionality of one of the central pieces of US legislation, partly on grounds of its retroactivity,[16] but failed before the US Supreme Court in April 2016.[17] Two months later, Iran commenced proceedings at the ICJ under the 1955 Treaty of Amity, Economic Relations and Consular Rights (‘Treaty of Amity’).[18] This treaty was then terminated by the US during the proceedings but had remained in force since 1957 despite the two countries severing diplomatic ties in 1980 following the Iranian revolution and seizure of the US embassy in Tehran.[19]
The case could have become central to the customary law of immunities, potentially ruling on whether the US was entitled to override Iran’s state immunity in cases of alleged terrorism, as the respondent argued. Commentators were doubtful that the US would succeed on this point,[20] raising the likelihood of a nearly USD2 billion compensation order for the seizure of the Bank Markazi funds in particular. In a 2019 judgment, though, the Court confirmed that it had jurisdiction only over claimed breaches of the Treaty of Amity rather than customary international law and it rejected Iran’s argument that the customary immunity rules were incorporated into that treaty.[21] The 2019 judgment also rejected US objections to jurisdiction or admissibility relating to abuse of process, unclean hands and the treaty’s exceptions clause for measures protecting ‘essential security interests’.
Bank Markazi’s funds may have enjoyed treaty protections, however, if the bank qualified as a ‘company’ under the treaty’s definition. In the 2019 judgment, the Court set out a test to answer this question, confirming that ‘company’ included state-owned entities with separate legal personality but asking whether the entity in question conducted any commercial activity alongside its sovereign activity.[22] However, the Court held that it did not have sufficient factual information to resolve the issue at that stage. This was therefore the first issue addressed in the 2023 judgment.
Iran had argued that the central bank’s purchase and management of certain financial instruments in the US was sufficient to demonstrate that it conducted commercial activities and was therefore a ‘company’ under the treaty.[23] However, the Court held that this activity, while apparently commercial in nature, was ‘carried out within the framework of and for the purposes of Bank Markazi’s principal activity’, being its ‘sovereign function as a central bank’.[24] Thus, the Court declined to view Bank Markazi as a protected ‘company’ and the bank enjoyed no protection under the treaty (even if it likely would enjoy protection under the customary immunity rules — which were, however, outside the Court’s jurisdiction, as noted above). Since the Bank Markazi funds constituted the bulk of Iran’s claims (nearly USD1.9 billion compared to around USD25 million seized from the other Iranian state-owned entities),[25] this finding dramatically reduced the financial significance of the case.[26]
Following this finding, the Court’s 2023 judgment went on to dismiss the US objection that the Iranian companies had failed to exhaust local remedies as required before Iran could espouse their claims under the law of diplomatic protection. According to the Court, there was no effective means of redress for the companies in the US legal system because US courts were bound to apply the domestic statutes even if they conflicted with the earlier Treaty of Amity.[27]
The Court then rejected three defences on the merits raised by the US, very similar to those it had raised at the earlier stage of jurisdiction and admissibility, relating to abuse of rights, the ‘clean hands’ doctrine and the treaty’s ‘essential security’ clause. While the ‘clean hands’ doctrine is discussed further below, the Court found no evidence that Iran was exercising its treaty rights ‘for purposes other than those for which the rights at issue were established’,[28] and no evidence of a link between the US measures and the state’s ‘essential security’.[29]
Turning to the merits of Iran’s claims, the Court held that the US measures had breached an obligation in art III(1) to recognise the ‘juridical status’ of Iranian companies. In the Court’s view, this obligation required recognition of the separate legal personality of the companies, and, by attaching liability to the state-owned companies for conduct of Iran itself, the US had ignored this separate legal personality.[30] The Court acknowledged that such piercing of the corporate veil was sometimes justified. However, in light of a further finding (discussed below) that the US measures were unreasonable in breach of art IV(1) because they failed to accord due process and were too broad,[31] the Court concluded that the measures also breached the obligation in art III(1). Moreover, the Court held that the US measures amounted to expropriation of the Iranian companies in breach of art IV(2) (also discussed below) and breached a clause guaranteeing freedom of commerce by, for example, impeding financial transactions by Iranian banks in the US and interfering with contractual debts owed by US companies.[32]
By contrast, the Court found no breaches of either art III(2)’s guarantee of access to courts or the protection against denial of justice which the Court found in art IV(1)’s guarantee of ‘fair and equitable treatment’. Using similar reasoning in relation to each obligation, the Court held that the companies had not been prevented from accessing US courts, even if they enjoyed limited substantive rights before those courts.[33] The Court added that a legislative removal of defences available to a litigant did not amount to a denial of justice.[34] Clauses on the ‘most constant protection and security’ of property (discussed below), the right to dispose of property, and the right of free transfer of funds, were also not breached.[35]
No compensation order was made by the Court; instead, the parties were given two years to find a settlement, failing which the Court will reopen the proceedings.[36] The Court further rejected Iran’s request for an apology as ‘satisfaction’ from the US and an order to cease the wrongful conduct. The Court noted that the Treaty of Amity was now terminated, meaning that the US had no ongoing obligation to comply with it, and that the judgment’s findings of breach were sufficient satisfaction for Iran.[37]
This section analyses the Court’s confusing and unreasoned approach to three of the main substantive protections in the Treaty of Amity which mirror protections usually available to investors under investment treaties — fair and equitable treatment, denial of justice, and (judicial) expropriation.
As noted above, one protection invoked by Iran in the case was the treaty’s guarantee of ‘fair and equitable treatment’ (‘FET’). One of the longstanding controversies within investment law relates to whether the FET clause in investment treaties is a standalone, ‘autonomous’ treaty provision that should be interpreted according to the rules of treaty interpretation or whether FET is actually a coded reference to the ‘minimum standard of treatment’ (‘MST’) in customary international law that should be understood by looking for evidence of state practice and opinio juris. Some treaties make the link to custom relatively clear, such as the Trans-Pacific Partnership which guarantees investors ‘treatment in accordance with applicable customary international law principles, including fair and equitable treatment’.[38] The controversy arises mostly in relation to treaties that contain clauses simply guaranteeing ‘fair and equitable treatment’ with no further elaboration. Scholars have differed at length on whether such unelaborated treaty clauses are autonomous or instead refer to custom; while the former view might be more obvious at a glance,[39] the latter view finds support in, amongst other factors, the history of states’ use of the phrase ‘fair and equitable treatment’ and the travaux préparatoires of some investment treaties.[40]
The relevant Treaty of Amity clause was an unelaborated one, simply requiring Iran and the US to ‘accord fair and equitable treatment to nationals and companies’ of the other state.[41] The question of the clause’s connection to the customary MST was thus poised to appear before the Court; indeed, reflecting the scholarly debate, the parties themselves took opposing views in pleadings (Iran supporting an autonomous view and the US supporting a link to custom).[42] Furthermore, several members of the Court have previously served as arbitrators in investment treaty cases, suggesting that at least those judges were likely to have been well familiar with the debate.[43] Despite all this,[44] the Court felt able to dismiss the US argument in two sentences; since the treaty clause did not explicitly refer to ‘international law’ or the ‘minimum standard’, there was simply ‘no need to examine’ the customary MST.[45]
Given the prominence of the ICJ in the international legal system,[46] this finding might be expected to preclude future debate on the issue in investment law. If so, it is unfortunate that this will occur on the basis of such surprisingly thin reasoning. However, prior to the decision, states had generally appeared to have rejected the position taken by the Court. Evidence from public pleadings in investment treaty proceedings indicates that no other state has ever directly supported Iran’s (and the Court’s) view.[47] By contrast, numerous states have expressly supported the US view, even in relation to FET clauses without an obvious textual link to custom.[48] It remains to be seen whether states will now abandon this position or will instead seek to sidestep the Court’s decision, perhaps by recalling that its binding effect is confined to the US and Iran under art 59 of the Statute of the International Court of Justice (‘ICJ Statute’).
Of course, some tribunals and commentators have contended that the practical difference between the two positions is ‘more apparent than real’.[49] However, apart from the methodological differences in determining the content of FET under each position, the content itself may be different.[50] For instance, ‘autonomous’ FET clauses are routinely interpreted to offer protection of investors’ legitimate expectations;[51] one tribunal even famously held in 2006 that protection of legitimate expectations was the ‘dominant element’ of the FET clause.[52] By contrast, the US, Canada and Mexico have consistently argued that the customary MST — and, therefore, FET clauses referring (explicitly or implicitly) to the MST — contains no such protection.[53] The ICJ itself has previously found that there is no principle of legitimate expectations in general international law, whether or not the principle is protected under specific treaty-based FET clauses.[54] For investors seeking protection of legitimate expectations, then, it may be crucial to demonstrate that the FET clause is autonomous rather than connected to custom.
What protections, then, did the FET clause contain according to the Court? On this question, the Court again offered very little clarity to investment law. The Court did hold that FET included the (presumably customary) prohibition against denial of justice.[55] But it apparently did so only on the basis that the parties agreed on this point, arguably lessening the broader relevance of the holding. Moreover, the Court did not explain why it was so quick to accept the parties’ agreement that the FET clause included protection against denial of justice, which it did only one paragraph after focusing closely on the text of the FET clause in order to reject the US argument about the clause’s connection to custom, and only two paragraphs after rejecting another US argument by finding that it had ‘no basis in the text of the Treaty’.[56] The notion that the FET clause included protection against denial of justice similarly has no obvious basis in the text of the treaty. Although reasons of judicial economy might favour it, the Court is not bound to take a particular view merely because both disputing parties agree with the view.[57]
The Court also found that FET included protection against unreasonable or discriminatory measures.[58] However, this finding was seemingly influenced by the fact that the treaty specifically provided this latter protection in the same clause as the FET guarantee. The Court was not concerned that this finding created an overlap between the FET guarantee and the unreasonable measures guarantee, despite the Court’s view that they were ‘distinct’, ‘independent’ and ‘separate’ obligations.[59] Furthermore, despite acknowledging the overlap, the Court did not appear to find any violation of this component of FET; instead, the US was held to have breached the specific guarantee against unreasonable measures.[60]
Further evidence of the Court’s view of FET can be found in its reasoning on the treaty’s ‘most constant protection and security’ obligation[61] (equivalent to the more typical investment treaty obligation of ‘full protection and security’ (‘FPS’)). Iran had contended that this obligation guaranteed both the legal security and the physical security of its companies’ property.[62] In Iran’s view, the US measures removing otherwise applicable legal defences and imposing liability on companies without due process in US courts violated the legal security aspect of this obligation.[63] The Court rejected this contention by reasoning that the treaty provided for FET and FPS in different clauses, suggesting that they were ‘separate standards of protection’.[64] In the Court’s view, the FPS standard was confined to physical security only; the two standards would ‘overlap significantly’ if FPS was interpreted also to include legal security.[65] Furthermore, the FPS clause was not intended to apply to factual situations covered by the FET clause, according to the Court.
This reasoning indicates that the Court saw some connection between FET and legal security. The nature of this connection is not spelled out in the judgment. However, rather than suggesting that the FET obligation contained a specific sub‑obligation of legal security, it is perhaps more likely that the Court meant to suggest that FET was generally concerned with situations or allegations of a lack of legal security. The two components of FET identified earlier by the Court — protections against denial of justice and against unreasonable or discriminatory measures — could both be viewed as manifestations of legal security. In relation to both components, the Court held only that FET ‘included’ or ‘encompassed’ the component,[66] implying that FET might also include other components. These other components might in turn be identified by asking whether they similarly constitute a manifestation of FET’s overall rationale of legal security. Although the Court did not engage with Iran’s contention that the principles of arbitrariness and legitimate expectations constituted further components of FET, these principles may well be good candidates in this regard.
A final curiosity in the Court’s FET analysis is the distinction between the Court’s concern for overlap between FET and FPS and its lack of concern for overlap between FET and unreasonable measures. The Court was worried about rendering the FET obligation inutile by including legal security within FPS, but it is unclear why it was not worried about rendering the unreasonable measures obligation inutile by including that obligation within FET. The Court appeared to address this by observing that FET and FPS were contained in different clauses of the treaty (arts IV(1) and (2) respectively)[67] — perhaps to be contrasted with FET and unreasonable measures, which were contained in the same clause (art IV(1)) but separated by semicolons. Nevertheless, as noted above, the Court insisted that FET and unreasonable measures were independent obligations, and it also observed that FET and FPS obligations were themselves sometimes contained within the same sentence in other treaties, seemingly without this affecting their similarly independent nature.[68] It is thus unlikely that the different placement of each obligation explains the difference in concern for overlap.
The judgment thus purported to offer some answers on the contested meaning of FET. But it did so with such limited reasoning and so many uncertainties, and seemingly in contradiction to prevailing views amongst states, that it is difficult to declare that those answers have advanced the law.
The ICJ has previously said little about denial of justice. The closest that the Court has come to elaborating the content of denial of justice was in the ELSI case, where the Court gave a well-known definition of arbitrariness as being ‘a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety’.[69] Concepts of arbitrariness are often central to denial of justice claims, meaning that the ELSI judgment might be taken to illuminate that aspect of denial of justice; the judgment has indeed sometimes been cited by investment tribunals in denial of justice analyses.[70] The ELSI Court also rejected a claim that a 16-month delay in local administrative proceedings breached the international minimum standard of treatment.[71] Since denial of justice is one of the central protections contained within the minimum standard,[72] this finding might indicate the Court’s view that delayed local proceedings can deny justice. Nevertheless, there was no actual claim for denial of justice in ELSI.
Certain Iranian Assets was the first case in which the ICJ has ruled on the merits of a claim for denial of justice, and, in that sense, it broke new ground.[73] After finding that the treaty’s FET obligation included protection against denial of justice (as discussed above), the Court applied this protection to the facts. It found no violation, because Iranian companies were not restrained from appearing before US courts and because a legislative removal of defences available to those companies did not constitute a ‘serious failure in the administration of justice’.[74] Thus, the Court offered a brief definition of the rule against denial of justice, viewed access to local courts as one requirement of the rule, and confirmed that legislative measures as well as judicial measures could breach the rule. While these findings go further than previous ICJ case law on denial of justice, they are well in line with traditional understandings of the rule as applied by other international courts and tribunals and as described by scholars.[75] For example, the ICJ’s predecessor, the PCIJ, described denial of justice in the SS ‘Lotus’ case as relating to ‘the manner in which the [domestic] proceedings ... were conducted’,[76] which might provide one instance of the definition in Certain Iranian Assets, and in Phosphates in Morocco, the PCIJ appeared to accept that refusal of access to court could constitute denial of justice.[77]
The Court in Certain Iranian Assets also found, as just noted, that removing defences otherwise available to litigants did not amount to denial of justice. The Court made no comment on the fact that the relevant legislation operated retroactively. In dissent, however, Judge Robinson held that ‘the introduction of legislation in the middle of an ongoing trial for the express purpose of assisting a party in that trial is quintessentially the kind of violation in the administration of justice that offends a sense of judicial propriety’ and, therefore, ‘constitutes a denial of justice’.[78] International adjudicators in other cases have taken views similar to that of Judge Robinson. The European Court of Human Rights, for instance, held in the well-known Stran Greek Refineries v Greece case that the Greek legislature had infringed the applicants’ right to a fair trial by ‘intervening in a manner which was decisive to ensure that the — imminent — outcome of proceedings in which it was a party was favourable to it’.[79] Investment treaty tribunals have also generally looked dimly upon retroactive laws, for instance in Cairn Energy v India (‘Cairn Energy’), where the retroactive application of a tax law led to the tribunal’s compensation order of more than USD1.2 billion.[80] The Cairn Energy tribunal did, however, recognise the possibility of an overriding public interest exception to concerns about retroactivity and the US itself referred to such an exception in its pleadings in Certain Iranian Assets.[81] The Court’s silence on this point is unfortunate, leaving it unclear whether it recognised a public interest exception and whether this putative exception was satisfied.
It is difficult to disagree with Judge Bhandari’s dissenting view that the Court should have demonstrated a ‘greater depth of analysis’ on Iran’s expropriation claims.[82] Without explanation, the judgment set out a test for the controversial notion of judicial expropriation that went beyond existing accepted views. The Court was then unclear on how that test was applied in the case, arguably set out a different test elsewhere in the judgment and was further unclear on which measures exactly constituted expropriations. The end result is one of regrettable confusion over the future of judicial expropriation claims.
The Court’s analysis appeared to focus on expropriation by way of judicial measures. The Court’s only clear finding of breach of art IV(2) was in relation to the US judicial measures; it held that ‘the application of [the US legislative measures] by United States courts’ amounted to an expropriation.[83] In the Court’s view, the US executive measures did not breach the treaty, because the main target of those measures was the property of Bank Markazi, which was outside jurisdiction.[84] As discussed further below, any finding that the legislative measures were expropriatory appears to have been made only incidentally, in the course of the Court’s principal analysis of the judicial measures.
In relation to the judicial measures, the Court held (without citing any authority) that a judicial expropriation could arise in two situations:
when a deprivation of property results from a denial of justice, or when a judicial organ applies legislative or executive measures that infringe international law and thereby causes a deprivation of property.[85]
As Judge Bhandari’s dissent explained, while the first situation is relatively well accepted, the Court’s second situation finds far less support in the literature and case law. If judicial conduct can amount to expropriation at all,[86] it is typically required to involve a denial of justice or, perhaps, some other wrong in the adjudicative process itself, rather than in the executive or legislative measures being applied by the court.[87] The Court’s definition both narrows (by confining judicial wrongs to denial of justice) and broadens (by including legislative or executive wrongs) the possibility for judicial expropriation findings.[88]
Given that the Court had already found no denial of justice, its eventual finding of judicial expropriation, applying the idiosyncratic test set out above, must have been based on a view that the US judiciary had ‘applie[d] legislative ... measures that infringe international law’.[89] There are at least two possible infringements of international law that the Court might have been referring to.
First, the relevant infringement might have been the legislative measures’ breach of art IV(1) upheld by the Court earlier in the judgment. However, this would not explain why the Court went on to analyse the ‘police powers’ doctrine (discussed below); it could have simply recalled its finding of breach of art IV(1), which would have automatically been sufficient to find a judicial expropriation and a breach of art IV(2).
Second, the relevant infringement was more likely instead an expropriation in breach of art IV(2)[90] (treated as incorporating the customary rule on expropriation).[91] This would naturally require a finding that the legislative measures were expropriatory and this is seemingly what the Court went to examine directly after setting out its test for judicial expropriation. The Court confirmed that the police powers doctrine exists in international law and that ‘the bona fide non-discriminatory exercise of certain regulatory powers by the government aimed at the protection of legitimate public welfare is not deemed expropriatory’.[92] However, one limit on this power, in the Court’s view, was reasonableness. Recalling its finding (made under its art IV(1) analysis) that the measures were substantively unreasonable, it then found that ‘the measures adopted by the United States did not constitute a lawful exercise of regulatory powers and amounted to compensable expropriation’.[93] The Court’s conclusion, although not spelled out, thus appeared to be that the judicial measures amounted to expropriation because they ‘applie[d] legislative ... measures that infringe[d] international law’[94] by breaching art IV(2).
One complication here is that the Court did not specify whether ‘the measures’ that were not lawful exercises of police powers were the legislative measures, the judicial measures or both. The immediate context of the paragraph suggests that the Court intended to refer to both sets of measures; the paragraph elsewhere recalled that both ‘the legislative provisions and ... their judicial enforcement’ were held to be unreasonable and that both the legislative measures and ‘their application by United States courts’ therefore violated art IV(1).[95] The broader context even suggests that the Court intended to refer only to the judicial measures. The Court framed its whole analysis in this section as determining whether the ‘attachment and execution’ of the property was expropriatory;[96] as the US observed,[97] the legislative measures themselves did not attach or execute any property but only made it subject to attachment and execution following a court order. In the next paragraph,[98] the Court began considering only whether judicial decisions can constitute expropriation. Immediately after its finding that ‘the measures’ amounted to expropriation, the Court appeared to repeat this finding, but this time specifying that ‘the application of [the legislative measures] by United States courts’ — ie, the judicial measures — amounted to expropriation.[99]
However, it is odd that the finding that ‘the measures’ infringed police powers would cover the judicial measures. The Court’s finding would then be that the judicial measures depriving of property were expropriatory because they were not valid exercises of police powers (because they were substantively unreasonable). But the police powers doctrine more naturally applies to the regulatory powers of the legislature and executive; it is a slight conceptual stretch to fit it to judicial measures.[100] In any event, the Court’s own test for judicial expropriation was that a judicial measure ‘applies legislative ... measures that infringe international law’.[101] This test does not seem to require any inquiry into the nature of the judicial measure itself; instead, it is the legislature’s breach that automatically gives rise to a judicial expropriation. But a finding that the US judicial measures were expropriatory because they were not valid exercises of police powers introduces a different test for judicial expropriation, demanding analysis of the judicial measures themselves (to determine, for instance, whether they were substantively unreasonable). Whether or not this test is more justifiable,[102] it seems internally inconsistent with the Court’s earlier stated test. At least for consistency, then, the better assumption is that the Court intended to find only that the legislative measures were invalid exercises of police powers.
This assumption would create another oddity: if the Court held the legislative measures in breach of the treaty, it is surprising that it did not state this in the final summary of its reasoning on the expropriation claim.[103] In turn, this oddity could be resolved by assuming that the finding in relation to the legislative measures was merely an incidental finding, en route to the principal determination that the judicial measures breached the treaty.[104] This assumption would fit with the Court’s framing of its whole expropriation analysis as focusing on the judicial measures, as noted above. The Court’s ultimate finding on expropriation, then, is best viewed as a finding that the judicial measures amounted to expropriation in breach of art IV(2) because they applied US laws that were themselves in breach of art IV(2), with the consequent deprivation of property.
Once again, as suggested by Judge Charlesworth and Judge ad hoc Barkett,[105] the judgment creates an overlap between different clauses of the Treaty of Amity: based on the Court’s analysis of police powers, legislative measures that breach the unreasonableness clause will apparently (where they deprive of property) automatically breach the expropriation clause. Once again, however, there is no indication of concern for this overlap, despite the Court’s worries about overlap between the FET and FPS clauses (discussed above). As discussed in the next section, this overlap may have consequences for the role of proportionality in investment law.
The judgment offers potentially important findings on the use of proportionality in investment law, although, here again, greater clarity about the Court’s meaning and intentions would have assisted.
In analysing the obligation on unreasonable measures, the Court gave a definition of reasonableness which is likely to be significant for future adjudicators. In the Court’s view, a measure is reasonable if it passes three tests: the measure must (1) pursue a legitimate public purpose; (2) display an ‘appropriate’ relationship with the purpose pursued; and (3) not have an adverse impact that is ‘manifestly excessive’ in relation to the purpose pursued.[106] Although the Court did not use the term ‘proportionality’,[107] this three-step test is similar in structure and content to the three-step proportionality test used by a variety of international courts and tribunals as a method of review of state measures. Proportionality typically involves a preliminary step of determining whether the stated purpose of the respondent state’s measure is a legitimate purpose. Following this, adjudicators will typically determine whether the measure is suitable to achieve that purpose (ie, whether applying the measure will cause the purpose to be achieved), whether the measure is necessary to achieve the purpose (in the sense that no measure that is less restrictive of the claimant’s rights was available) and whether the measure’s effect on the claimant is excessively burdensome compared to the public benefits of achieving the purpose (known as the strict proportionality stage).[108]
The use of proportionality testing has become relatively well established in international trade law and human rights law as well as in other areas of international law and domestic constitutional law.[109] However, its potential use in investment law remains unclear and controversial. The Court’s enunciation of a proportionality test in the context of an unreasonable measures clause — a clause found in two-thirds of investment treaties,[110] and displaying overlaps with the ubiquitous FET obligation, as the Court noted — is likely to be significant in several respects.
First, investment tribunals have previously differed on whether analyses of reasonableness under FET or an unreasonable measures clause actually involve all three steps of the traditional proportionality analysis, or indeed go no further than the preliminary step.[111] The Court’s three-step test confirms that suitability and strict proportionality, at least, are part of the proportionality (or reasonableness) test.
Second, the suitability step (the second step in the Court’s test) is normally described as requiring a causal relationship or rational connection between the measure and its stated purpose. By contrast, the Court’s reference to an ‘appropriate’ relationship is somewhat vague and seems to set a low bar, potentially being satisfied where the measure makes even a relatively minimal contribution to achieving the purpose. Thus, although the Court confirmed that a suitability analysis was required, it may not be difficult for respondent states to satisfy this step.
Third, the Court’s three steps map onto the preliminary, first and third steps of the more usual proportionality structure. The Court therefore did not expressly include the necessity step, instead passing straight from suitability to strict proportionality. This is significant because the three (or four) steps of the proportionality test are usually understood as involving an increasing intensity of review, constraining adjudicators to scrutinise state decisions as little as possible.[112] Omitting the necessity step would seem to lead to more frequent application of the most intrusive strict proportionality step, particularly with the low bar apparently set for the suitability step as noted above. This final stage of the proportionality test is the most controversial because it entails balancing of competing values by adjudicators who, arguably, cannot legitimately undertake that balancing.[113] Indeed, commentators have argued that investment tribunals should exclude the strict proportionality step from proportionality analyses and should instead go no further than necessity testing.[114] Even if the venerable Court viewed itself as having the appropriate standing to ask the ‘normative questions [inherent in the strict proportionality step] to which the answer will depend on a number of implicit political, moral, ideological and economic beliefs and assumptions’,[115] it is not clear that ad hoc investment treaty tribunals enjoy similar standing.
Yet, given the frequency of FET claims before investment tribunals, and given the Court’s earlier comment that ‘fair and equitable treatment can encompass protection against unreasonable ... measures’,[116] one might now expect intrusive strict proportionality testing to feature in many future investment awards. Indeed, the Court may have endorsed a role for proportionality even beyond FET claims. One broader effect of the reasonableness–expropriation overlap recognised by the Court (discussed above) is seemingly to confirm that determination of expropriation claims must also entail a proportionality analysis, to decide whether a property-depriving measure was reasonable and therefore whether it was either within police powers or expropriatory. While some investment tribunals and some recent treaties have connected proportionality testing to the concept of expropriation, commentators disagree on whether this is now, or should be, a mainstream approach.[117] As with FET, the judgment in Certain Iranian Assets may further solidify the role of proportionality in investment law though perhaps without intending to do so.
Nevertheless, one potential counterweight to this far-reaching conclusion lies in the Court’s actual application of the strict proportionality test. In relation to the legislative and judicial measures, the Court held that they were manifestly excessive in light of their purpose (of providing effective remedies to plaintiffs) because the measures resulted in seizing the property of companies ‘in relation to liability judgments rendered in cases in which those companies could not participate and in relation to facts in which those companies do not appear to have been involved’.[118] The Court also appeared concerned by the ‘very broad terms’ of the legislation ‘which are capable of encompassing any legal entity, regardless of Iran’s type or degree of control over them’.[119] Rather than being a finding about manifest excessiveness, though, another way of reading these statements is that they constituted a finding that the measures were not the least restrictive ones available to the US. While seizing the assets of uninvolved companies without due process might well contribute to achieving the purpose of providing compensation for plaintiffs, seizing the assets of a more targeted group of companies with due process might have done so in a way that was less restrictive of the companies’ rights. Although the Court framed its analysis as a strict proportionality one, in substance it may have conducted more of a necessity test. This point is arguably even clearer in relation to the executive measures, which the Court held were manifestly excessive because they covered all Iranian financial institutions and were ‘not adopted for the purpose of providing compensation to plaintiffs’.[120] This reasoning looks far less like strict proportionality testing and much more like necessity — or even simple suitability — testing. If this is correct, the third step in the Court’s test for reasonableness may not be a strict proportionality test in practice despite the Court’s description, challenging the view that the judgment will encourage (or even direct) investment tribunals to undertake strict proportionality testing in future.
The distinction between justifications and excuses is central to the concept of defences in law.[121] A justification is a defence that renders conduct lawful (or, sometimes, ‘permissible’ or ‘warranted’) despite a prima facie breach of some rule. By contrast, an excuse is a defence that accepts the unlawfulness of the conduct but excludes the negative consequences of the unlawfulness for the particular actor engaging in the conduct. The general circumstances precluding wrongfulness under customary international law (including the customary defence of necessity) are examples of excuses; they assume that a state has breached international law but they preclude the wrongfulness of that breach for the state in question. It is not always clear, by contrast, whether specific defences contained in treaties are to be characterised as justifications or excuses. The distinction can be significant. Several early investment treaty tribunals, for example, differed on the proper characterisation of the essential security defence contained in art XI of the US‒Argentina bilateral investment treaty (‘BIT’).[122] If the defence in the treaty was a justification, the similar customary law defence of necessity would have no application if the treaty defence was successfully invoked, because there would be no breach of international law in the first place. If the treaty-based defence was an excuse, however, the customary defence could apply alongside it even if it was not successfully invoked and might even be used to interpret it and inform its content.
In Certain Iranian Assets, the US invoked two provisions of art XX of the Treaty of Amity, containing defences for measures ‘regulating ... traffic in arms’ and (similar to art XI of the US–Argentina BIT) measures ‘necessary to protect ... essential security interests’.[123] In its 2019 ruling rejecting the relevance of these defences to its jurisdiction, the Court did not clarify whether it viewed art XX of the Treaty of Amity as a justification or an excuse. The closest that it came was while recounting Iran’s argument, which, however, used language consistent with both justification and excuse.[124] The 2023 ruling, meanwhile, which rejected the US invocation of art XX as a defence on the merits, contained only two brief hints of the Court’s view. It firstly commented that art XX ‘cannot be relied upon to justify measures taken by a party ... which are solely intended to have an indirect effect on ... traffic in arms’.[125] Secondly, the Court described Iran as arguing (on the so-called ‘self-judging’ issue) that it was not sufficient for a state simply to declare that a measure was ‘warranted’ under art XX, but that the Court must determine this itself.[126] Iran’s merits pleadings did not use the term ‘warranted’ when discussing the ‘self-judging’ issue,[127] which may suggest that the Court’s own introduction of it — a synonym for ‘justified’ in this context, as mentioned above — is significant. Both these hints point to a characterisation of justification rather than excuse. Ultimately, though, since the Court found the defence not satisfied and since the US chose not to invoke the most relevant circumstance precluding wrongfulness (the defence of countermeasures, as explained below) the Court did not need to characterise the defence further. Greater clarity from the ICJ on this point would have assisted adjudicators dealing with treaty-based defences in other contexts.
When the case was first filed at the Court, commentators had speculated that the US might seek to raise a defence of countermeasures.[128] Under the rule codified in art 22 of the International Law Commission’s (‘ILC’) Articles on Responsibility of States for Internationally Wrongful Acts (‘Articles on State Responsibility’), the wrongfulness of an act that is apparently in breach of international law is precluded if the act constitutes a countermeasure taken against a state which is itself in breach of international law.[129] The US might thus have argued that its measures, even if prima facie in breach of the Treaty of Amity, were a justified response to earlier unlawful conduct by Iran, namely Iran’s support for terrorism and breaches of nuclear non-proliferation obligations as alleged by the US.
However, the likely success of a countermeasures defence was unclear. Amongst other matters, under art 49 of the Articles on State Responsibility, countermeasures must be reversible, and must be taken in order to induce the state in breach (on this argument, Iran) to comply with its obligations. It is possible that the US measures may have failed these requirements if put to the test: it may be difficult to reverse the seizure of assets, particularly real property, once transferred to private parties as compensation and distributing funds to terrorism victims may aim more at repairing harm caused by Iran than at inducing Iran to comply with its obligations.[130] Furthermore, under art 50, countermeasures cannot breach fundamental human rights obligations. Whether or not the long-term effects of the US sanctions program against Iran (of which the impugned measures were one part) have violated the human rights of Iran’s population,[131] raising a countermeasures defence might have opened the door for Iran to argue on this front before the ICJ, a situation which the US might have wished to avoid. Ultimately, perhaps with some of these considerations in mind, the US did not rely on a countermeasures defence, and Iran’s pleadings and the Court’s judgments therefore say nothing on the point.
Although the US did not raise a defence of countermeasures it did rely on the doctrine of clean hands both at the admissibility stage and on the merits.[132] In broad terms, this doctrine — if it exists — prevents a state from succeeding before the Court if the state comes with ‘unclean hands’; in other words, a claimant state cannot complain about a respondent state’s allegedly unlawful conduct if the claimant state itself has breached international law.[133] The doctrine thus potentially provides a similar defence to countermeasures, but with somewhat looser constraints on its application.[134]
However, in its 2019 judgment on preliminary objections, the Court held that, even if Iran had breached international law, ‘this would not be sufficient per se to uphold the objection to admissibility’ based on the clean hands doctrine.[135] Several months later, in the Jadhav case, the Court further confirmed that ‘such an argument could not be relied upon in support of an objection to admissibility’.[136] In the 2023 Certain Iranian Assets judgment, the Court pointedly observed that it had ‘never held that the doctrine in question [whether as a defence to admissibility or to merits] was part of customary international law or constituted a general principle of law’.[137] While the Court permitted the US to invoke the defence again on the merits in Certain Iranian Assets, it similarly rejected the argument, again declaring that it would treat the defence with ‘the utmost caution’.[138] The Court noted that the ILC had declined to include the doctrine in the Articles on State Responsibility as a circumstance precluding wrongfulness, alongside countermeasures, on the ground that it had been mainly invoked at the admissibility stage (rather than the merits stage) in international claims and had only rarely been upheld even at that stage.[139]
In rejecting the US argument, though, the Court considered the conditions for application of the defence as argued by the US. One such purported condition was the existence of a ‘nexus’ between Iran’s prior breaches and its claims in the present case.[140] The Court saw no sufficient nexus, partly because the US did not allege that Iran had breached the Treaty of Amity itself. This reasoning might be viewed in two ways. One might firstly observe that the Court began by noting its ‘utmost caution’ over the defence and only then continued to find that ‘[i]n any event’ the defence would fail even under the conditions as argued by the US.[141] On this view, the Court offered no endorsement of the defence’s existence and no reason to think that it would engage with the defence in future cases. Alternatively, the fact that the Court even considered the (US view of the) substance of the defence, rather than simply ignoring or sidestepping it as in previous cases,[142] might indicate that a window remains open for its application in future.[143] The Court, after all, had expressly ‘reserv[ed] its position’ on the defence in its 2019 judgment and did nothing to foreclose that position in the 2023 judgment. Arguably, for a defence that could have been determinative of the whole claim the Court might have been expected to clarify the conditions for the defence’s application if it disagreed with the US presentation of those conditions.[144] The fact that it did not do so perhaps even implies some agreement with the US view of the law even if the argument failed on the facts.[145] Any recognition of a clean hands defence on the merits would have widespread effects across international law, not least in investment treaty proceedings where the defence is already invoked by respondents relatively frequently.[146]
Although the Court upheld several of Iran’s arguments on the merits, the claimant’s victory in financial terms — whatever amount that might be — will be dramatically smaller than it might have hoped, due to the Court’s decision to exclude Bank Markazi’s billion-dollar assets from treaty protection. The fate of even this modest success is not clear, given that the US has previously failed to comply with the Court’s unfavourable rulings.[147] In a statement following the judgment, the US State Department indeed declared a ‘major victory’ for itself, noting only its ‘disappointment’ with the Court’s findings against it and concluding that it would continue to ‘seek to hold Iran ... accountable’ for its ‘[s]tate-sponsored terrorism’.[148] Nevertheless, Iran appeared to view the ruling as a win and has recently returned to the Court to file a claim against Canada in relation to very similar facts.[149] Despite its own record of ignoring adverse ICJ rulings,[150] Iran has now accepted the Court’s compulsory jurisdiction under art 36(2) of the ICJ Statute — albeit perhaps strategically,[151] aiming to give the Court a basis for jurisdiction over customary international law (including the law of state immunity) in the new case against Canada. The outcome in Certain Iranian Assets may thus vindicate Iran’s use of the Court to ‘shine the spotlight on US actions’ and to gain ‘greater international support for its position’ before ‘an international forum that may be perceived as less susceptible to US influence’.[152]
The merits judgments in Certain Iranian Assets will also have immediate significance for the parallel claim brought by Iran against the US under the same treaty, relating to sanctions re-imposed on Iran by the US following the US termination of the Joint Comprehensive Plan of Action (the ‘Iran nuclear deal’)[153] in 2018.[154] That pending case involves several of the same treaty provisions at issue in Certain Iranian Assets including the FET clause and essential security defence. The case may further be significant for Russia and Russian investors who are now subject to a range of sanctions similar to those placed on Iran. According to news reports, frozen Russian assets held by Clearstream, the same depository that held the assets at issue in Certain Iranian Assets, may soon be at the centre of potential investment treaty proceedings against European countries.[155] If those claims proceed, tribunals may be called on to determine whether such asset freezes — and mooted plans to use the assets to compensate Ukraine — violate treaty commitments, drawing comparisons to Certain Iranian Assets.
The case may have contributed to sustaining the current regime of international investment law in at least one respect: the proceedings highlight the downsides of the Court, compared to investment treaty arbitration, as a practical site for resolution of disputes over property and economic interests. The speed of the procedure — nearly seven years to a merits ruling and probably at least three more years before a quantum ruling unless an earlier settlement is reached — compares unfavourably with proceedings under investment treaties, which generally last around four years from filing to quantum award.[156] The requirement for the Iranian companies to have exhausted local remedies before Iran could espouse their claim at the ICJ — which would not have been required for an investment treaty claim[157] — in practice added further years to the proceedings as the companies pursued their defences and appeals in US courts.
Beyond this ‘contribution’, though, the judgment otherwise leaves so much unsaid that the central issues of investment law, and other areas of international law, will remain for determination elsewhere. The judgment offers no comment, for example, on the general lawfulness of the US (or others’) sanctions programs beyond their control by specific treaties such as the Treaty of Amity,[158] nor any comment — due to jurisdictional limitations — on the US (and Canadian) claimed exception to state immunity in cases of terrorism. More may soon be offered in Iran’s pending cases at the Court; until then, investment lawyers seeking clarity will return to the world of arbitration and the trickle of substantive reforms in new treaties.[159]
[*] Associate Professor, Melbourne Law School.
[1] See generally Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2nd ed, 2017). On procedure: see, eg, Jeffery P Commission and Rahim Moloo, Procedural Issues in International Investment Arbitration (Oxford University Press, 2018); Chester Brown, A Common Law of International Adjudication (Oxford University Press, 2007).
[2] Timothy McKenzie, ‘An Analysis of the Use of ICJ Jurisprudence in Investor–State Dispute Settlement’, EJIL:Talk! (Blog Post, 13 May 2019) <https://www.ejiltalk.org/an-analysis-of-the-use-of-icj-jurisprudence-in-investor-state-dispute-settlement>, archived at <https://perma.cc/KPT5-NX6N>.
[3] Alain Pellet, ‘The Case Law of the ICJ in Investment Arbitration’ (2013) 28(2) ICSID Review 223, 231.
[4] Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo) (Preliminary Objections) [2007] ICJ Rep 582; Ahmadou Sadio Diallo (Republic of Guinea v Democratic Republic of the Congo) (Judgment) [2010] ICJ Rep 639 (‘Diallo’).
[5] Dissenting in Diallo (n 4), Judges Al-Khasawneh and Yusuf lamented that the Court had ‘missed a chance ... to bring the standard of protection [of investors] of customary international law up to the standard of modern investment law’: at 711 (Judges Al-Khasawneh and Yusuf).
[6] Certain Iranian Assets (Islamic Republic of Iran v United States of America) (Judgment) (International Court of Justice, General List No 164, 30 March 2023) (‘Certain Iranian Assets’).
[7] Ibid [23].
[8] Ibid [24].
[9] Ibid [25].
[10] Ibid.
[11] Peterson v Iran, 515 F Supp 2d 25 (D DC, 2007).
[12] Ibid [26]–[29].
[13] Ibid [28].
[14] Ibid [30].
[15] Ibid [30], [37].
[16] Ibid [19] (Judge Robinson).
[17] Bank Markazi v Peterson, 578 US 212 (2016).
[18] Certain Iranian Assets (n 6) [1]. See Treaty of Amity, Economic Relations, and Consular Rights between the United States of America and Iran, signed 15 August 1955, 284 UNTS 93 (entered into force 16 June 1957) (‘Treaty of Amity’).
[19] The embassy seizure led to the well-known Tehran Hostages judgment at the ICJ in 1980: United States Diplomatic and Consular Staff in Tehran (United States of America v Iran) [1980] ICJ Rep 3 (‘Tehran Hostages’).
[20] Philipp Janig and Sara Mansour Fallah, ‘Certain Iranian Assets: The Limits of Anti‑Terrorism Measures in Light of State Immunity and Standards of Treatment’ (2016) 59 German Yearbook of International Law 355, 377; Elena Chachko, ‘Certain Iranian Assets: The International Court of Justice Splits the Difference between the United States and Iran’ Lawfare (Blog Post, 14 February 2019) <https://www.lawfaremedia.org/article/certain-iranian-assets-international-court-justice-splits-difference-between-united-states-and-iran>, archived at <https://perma.cc/8JFY-DK4K>.
[21] Certain Iranian Assets (Islamic Republic of Iran v United States America) (Preliminary Objections) [2019] ICJ Rep 7, 34 [80] (‘Certain Iranian Assets (Preliminary Objections)’).
[22] Ibid 37–9 [87]–[92]. See also Certain Iranian Assets (n 6) [51].
[23] Certain Iranian Assets (n 6) [37].
[24] Ibid [50].
[25] Ibid [1] (Judge Bennouna).
[26] Several dissenting judges, as well as commentators, criticised the Court for ‘mov[ing] the goal posts in the middle of the case’: see, eg, ibid [10] (Judge Yusuf). While the 2019 judgment emphasised the nature of an entity’s activities to determine whether the entity was a ‘company’, the 2023 judgment introduced analysis of the activities’ purpose instead: at [6] (Judge Bennouna), [14] (Judge Robinson), [10] (Judge Salam), [10] (Judge ad hoc Momtaz). See also Moritz Rhades, ‘Certain Iranian (Frozen) Assets: Der widerspruchliche Umgang des IGH mit der iranischen Zentralbank [The ICJ’s Contradictory Dealing with the Iranian Central Bank], Völkerrechtsblog (Blog Post, 17 April 2023) <voelkerrechtsblog.org/de/certain-iranian-frozen-assets/>, archived at <https://perma.cc/X5R8-4VAH> [tr author].
[27] Certain Iranian Assets (n 6) [72]. Two judges dissented from this finding, arguing that success in US courts was perhaps unlikely but not impossible, and that the Iranian companies had not yet exhausted local remedies: at [15]–[16] (Judge ad hoc Barkett), [12] (Judge Sebutinde).
[28] Ibid [93].
[29] Ibid [108]. The Court also rejected a defence under the treaty for measures regulating ‘traffic in arms’; in the Court’s view, whatever the effect of the US measures on Iran’s alleged arms trafficking, the defence related only to the US’ own traffic in arms: at [102].
[30] Ibid [159].
[31] The Court did not address a claim that the measures were discriminatory, on the grounds that art IV(1) prohibited measures that were ‘unreasonable or discriminatory’, making a finding of unreasonableness sufficient for breach: ibid [144], [158].
[32] Ibid [184]–[187], [218]–[223].
[33] Ibid [143], [167].
[34] Ibid [143].
[35] Ibid [191], [201], [208].
[36] Ibid [231].
[37] Ibid [228], [233].
[38] Comprehensive and Progressive Agreement for Trans-Pacific Partnership, signed 8 March 2018, [2018] ATS 23 (entered into force 30 December 2018) (‘Trans-Pacific Partnership’), incorporating Trans-Pacific Partnership Agreement, signed 4 February 2016, [2016] ATNIF 2 (not in force) art 9.6.1.
[39] Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2nd ed, 2012) 134.
[40] Martins Paparinskis, The International Minimum Standard and Fair and Equitable Treatment (Oxford University Press, 2013); Jarrod Hepburn et al, ‘Investment Law before Arbitration’ (2020) 23(4) Journal of International Economic Law 929, 946. Cf Federico Ortino, The Origin and Evolution of Investment Treaty Standards: Stability, Value and Reasonableness (Oxford University Press, 2019) 109–11 (‘Origin and Evolution of Investment Treaty Standards’).
[41] Certain Iranian Assets (n 6) [123]. See Treaty of Amity (n 18) art IV(1).
[42] Certain Iranian Assets (n 6) [126], [132].
[43] Those judges are Peter Tomka, Abdulqawi Ahmed Yusuf and Ronny Abraham.
[44] As Pellet has observed, the Court ‘seems to ignore the case law of other international courts and tribunals’: Pellet (n 3) 225.
[45] Certain Iranian Assets (n 6) [141].
[46] Investment tribunals not only ‘refer to the jurisprudence of the World Court, but they show a particular deference to it’: Pellet (n 3) 230.
[47] Some states have offered indirect support for the view that FET is an autonomous standard unconnected to custom. Pleadings from Lebanon, for example, denied a claimant’s suggestion that the state was conflating FET with custom, perhaps implying that the two standards are unconnected: El Jaouni v Lebanon (Decision on Jurisdiction, Liability and Certain Aspects of Quantum) (ICSID Arbitral Tribunal, Case No ARB/15/3, 25 June 2018) [494]. Pleadings from Mongolia have similarly referred to both FET and the customary MST as if they were separate standards: Khan Resources Inc v Mongolia (Award on the Merits) (Permanent Court of Arbitration, Case No 2011-09, 2 March 2015) [223]. Pleadings from the Netherlands and Chile have not expressly argued that FET was connected to custom, thereby perhaps implying the opposite (although Chile drew attention to the view that FET was connected to custom): ‘Respondent’s Counter-Memorial’, RWE AG v Netherlands (ICSID Arbitral Tribunal, Case No ARB/21/4, 5 September 2022) [875]–[878]; MTD Equity Sdn Bhd v Chile (Award) (ICSID Arbitral Tribunal, Case No ARB/01/7, 25 May 2004) [111]. Guatemala’s pleadings on an unelaborated FET clause in one case similarly did not refer to custom, and the tribunal noted that it ‘is agreed’ that FET set a lower threshold for breach than the customary MST, but the tribunal did not clarify whether it meant that this was agreed by Guatemala or merely generally agreed in the field: IC Power Asia Development Ltd v Guatemala (Final Award) (Permanent Court of Arbitration, Case No 2019-43, 7 October 2020) [465]–[508], [583]. Colombia has offered more ambiguous pleadings, suggesting that an autonomous FET clause has a different meaning than one linked to the customary MST, but also arguing (in the same case) that the claimant had not proven that an autonomous FET clause did not simply reflect custom in any event: Red Eagle Exploration Ltd v Colombia (Award) (ICSID Arbitral Tribunal, Case No ARB/18/12, 28 February 2024) [229]–[238]. None of these examples necessarily offers much support for an autonomous view of FET. However, states’ pleadings in investment treaty disputes are frequently not publicly available and not fully described in tribunals’ decisions. Pleadings more explicitly supporting Iran’s view may therefore exist, which would qualify the claim here.
[48] See, eg, pleadings from Argentina, Jordan, Uruguay, India, Sri Lanka, Tanzania and Mauritius: Casinos Austria International GmbH v Argentina (Award) (ICSID Arbitral Tribunal, Case No ARB/14/32, 5 November 2021) [286]; Fouad Alghanim & Sons Co for General Trading & Contracting v Jordan (Award) (ICSID Arbitral Tribunal, Case No ARB/13/38, 14 December 2017) [254]; Philip Morris Brands SARL v Uruguay (Award) (ICSID Arbitral Tribunal, Case No ARB/10/7, 8 July 2016) [314]; Deutsche Telekom AG v India (Interim Award) (Permanent Court of Arbitration, Case No 2014–10, 13 December 2017) [310]; Deutsche Bank AG v Sri Lanka (Award) (ICSID Arbitral Tribunal, Case No ARB/09/02, 31 October 2012) [414]; Biwater Gauff (Tanzania) Ltd v Tanzania (Award) (ICSID Arbitral Tribunal, Case No ARB/05/22, 24 July 2008) [587]; Gosling v Mauritius (Award) (ICSID Arbitral Tribunal, Case No ARB/16/32, 18 February 2020) [179].
[49] Saluka Investments BV v Czech Republic (Partial Award) (Permanent Court of Arbitration, Case No 2001-04, 17 March 2006) [291] (‘Saluka’); Dolzer and Schreuer (n 39) 138. See also ‘Memorial of the Islamic Republic of Iran’, Certain Iranian Assets (Islamic Republic of Iran v United States of America) (International Court of Justice, General List No 164, 1 February 2017) [5.26], arguing that the Treaty of Amity protected companies’ legitimate expectations regardless of the connection between FET and custom.
[50] See, eg, Lone Pine Resources Inc v Canada (Final Award) (ICSID Arbitral Tribunal, Case No UNCT/15/2, 21 November 2022) [601] (‘Lone Pine’).
[51] Dolzer and Schreuer (n 39) 145.
[53] The US repeated these arguments in Certain Iranian Assets: see ‘Counter-Memorial Submitted by the United States of America’, Certain Iranian Assets (Islamic Republic of Iran v United States of America) (International Court of Justice, General List No 164, 14 October 2019) [14.21] (‘US Counter-Memorial’). One recent award acknowledged the continuing ‘debate’ over this point: Lone Pine (n 50) [614].
[54] Obligation to Negotiate Access to the Pacific Ocean (Bolivia v Chile) (Judgment) [2018] ICJ Rep 507, 559 [162]. However, the Court was arguably discussing a principle of interstate, rather than investor–state, relations.
[55] Certain Iranian Assets (n 6) [142].
[56] Investment treaty tribunals have also consistently accepted that FET includes the customary denial of justice obligation, regardless of the text of the particular FET clause: Filip Balcerzak and Jarrod Hepburn, ‘Manchester Securities v Poland: Denial of Justice in the European Union’ (2020) 35(3) ICSID Review 478, 487.
[58] Certain Iranian Assets (n 6) [144].
[59] Ibid [140], [144].
[60] Ibid [156]–[158].
[61] Treaty of Amity (n 18) art II(4).
[62] Certain Iranian Assets (n 6) [171].
[63] Ibid. Iran did not contend that its companies had been denied physical security: at [191].
[64] Ibid [190].
[65] Ibid.
[66] Ibid [142], [144].
[67] Ibid [190].
[68] Ibid.
[69] Elettronica Sicula SpA (ELSI) (United States of America v Italy) (Judgment) [1989] ICJ Rep 15, 76 [128] (‘ELSI’).
[70] See, eg, Chevron Corporation v Ecuador (Second Partial Award on Track II) (Permanent Court of Arbitration, Case No 2009–23, 30 August 2018) [8.38]. See also Dan Cake (Portugal) SA v Hungary (Decision on Jurisdiction and Liability) (ICSID Arbitral Tribunal, Case No ARB/12/9, 24 August 2015) [146], which even describes ELSI as defining denial of justice.
[72] As the US argued: see Certain Iranian Assets (n 6) [132]. Given this, it is even more strange that the Court so swiftly rejected any link between FET and the customary MST before then immediately accepting that the content of FET comprised one of the central protections of the customary MST: at [141]–[142] as discussed above.
[73] Denial of justice was the central claim in Barcelona Traction, but as is well known, the ICJ rejected the admissibility of that claim, finding that the claimant state had no standing: see Barcelona Traction, Light and Power Company Ltd (Belgium v Spain) (Judgment) [1970] ICJ Rep 3.
[74] Certain Iranian Assets (n 6) [143].
[75] See, eg, Jan Paulsson, Denial of Justice in International Law (Cambridge University Press, 2005) 204–6; Paparinskis (n 40) 189.
[76] SS ‘Lotus’ (France v Turkey) (Judgment) [1927] PCIJ (ser A) No 10, 13.
[77] Phosphates in Morocco (Italy v France) (Preliminary Objections) [1938] PCIJ (ser A/B) No 74, 28. However, the PCIJ declined jurisdiction over the denial of justice claim in this case.
[78] Certain Iranian Assets (n 6) [20]–[21] (Judge Robinson).
[79] Stran Greek Refineries v Greece [1994] ECHR 48; (1994) 19 EHRR 293, 18 [50].
[80] Cairn Energy PLC v India (Final Award) (Permanent Court of Arbitration, Case No 2016-7, 21 December 2020) [2032]. Several tribunals have also criticised Spain for imposing retroactive changes to renewable energy incentives: see, eg, Infracapital F1 SÀRL v Spain (Decision on Jurisdiction, Liability and Directions on Quantum) (ICSID Arbitral Tribunal, Case No ARB/16/18, 13 September 2021) [695]–[698], [793].
[81] ‘US Counter-Memorial’ (n 53) [14.47]–[14.49].
[82] Certain Iranian Assets (n 6) [1] (Judge Bhandari).
[83] Ibid [187].
[84] Ibid [188].
[85] Ibid [184].
[86] One recent investment tribunal viewed this as an ‘open question of law’: IC Power Asia Development Ltd v Guatemala (Final Award) (Permanent Court of Arbitration, Case No 2019-43, 7 October 2020) [433].
[87] See generally Vid Prislan, ‘Judicial Expropriation in International Investment Law’ (2021) 70(1) International and Comparative Law Quarterly 165.
[88] Judge ad hoc Barkett viewed the Court’s definition as ‘a stark and extraordinarily broad pronouncement that recasts the notion of judicial expropriation’: Certain Iranian Assets (n 6) [39] (Judge ad hoc Barkett).
[89] Ibid [184].
[90] Cf Ostransky, who understood the Court as implying that the illegality ‘must relate to some other norm of international law than expropriation’: Josef Ostransky, ‘The ICJ Decides on the Content of International Protection Standards: A Lost Opportunity?’ Investment Treaty News (Blog Post, 1 July 2023) <https://www.iisd.org/itn/en/2023/07/01/the-icj-decides-on-the-content-of-international-protection-standards-a-lost-opportunity>, archived at <https://perma.cc/XMB9-ZALL>.
[91] It seems clear from the Court’s analysis that it viewed the reference to ‘taking’ in art IV(2) as a reference to the customary rule on expropriation. The Court noted the parties’ interchangeable use of the terms ‘taking’ and ‘expropriation’: Certain Iranian Assets (n 6) [177]. It did not attempt to interpret ‘taking’ as an autonomous treaty term, contrasting with its analysis of the phrase ‘fair and equitable treatment’ in art IV(1): at [141].
[92] Ibid [185].
[93] Ibid [186] (emphasis added).
[94] Ibid [184].
[95] Ibid [186].
[96] Ibid [183].
[97] Ibid [175].
[98] Ibid [184].
[99] Ibid [187].
[100] Cf ‘Reply of the Islamic Republic of Iran’, Certain Iranian Assets (Islamic Republic of Iran v United States of America) (International Court of Justice, General List No 164, 17 August 2020) [7.24].
[101] Certain Iranian Assets (n 6) [184] (emphasis added).
[102] A test focusing on the judicial measures themselves would arguably fit more closely with accepted views on judicial expropriation, as discussed above.
[103] Certain Iranian Assets (n 6) [187]. The paragraph concluded only that ‘the application of [the legislative measures] by United States courts’ breached art IV(2). The judgment’s dispositif found only that the US breached art IV(2), without specifying which measures breached that clause: at [236].
[104] More complicated questions might have arisen if the legislative measures were alleged to have breached some rule of international law other than the Treaty of Amity, such as the customary rule against expropriation (rather than the treaty clause incorporating that rule). In that situation, the Court would be required to make an incidental finding on an issue outside its jurisdiction, the permissibility of which is disputed: see Callista Harris, ‘Incidental Determinations in Proceedings under Compromissory Clauses’ (2021) 70(2) International and Comparative Law Quarterly 417.
[105] Certain Iranian Assets (n 6) [3] (Judge Charlesworth), [40] (Judge ad hoc Barkett).
[106] Ibid [147]–[149].
[107] The judgment recounted the parties’ arguments that referred to proportionality but the Court’s own analysis did not use the term: see, eg, ibid [127], [134].
[108] See, eg, Caroline Henckels, Proportionality and Deference in Investor–State Arbitration: Balancing Investment Protection and Regulatory Autonomy (Cambridge University Press, 2015) 24–6 (‘Proportionality and Deference in Investor–State Arbitration’).
[109] Ibid 23–4.
[110] According to United Nations Trade and Development (‘UNCTAD’) data: UNCTAD, ‘International Investment Agreements Navigator’, Investment Policy Hub (Web Page) <investmentpolicy.unctad.org/international-investment-agreements/iia-mapping>.
[111] Ortino, Origin and Evolution of Investment Treaty Standards (n 40) 128.
[112] Caroline Henckels, ‘Indirect Expropriation and the Right to Regulate: Revisiting Proportionality Analysis and the Standard of Review in Investor–State Arbitration’ (2012) 15(1) Journal of International Economic Law 223, 227 (‘Indirect Expropriation and the Right to Regulate’); ibid 104.
[113] Henckels, Proportionality and Deference in Investor–State Arbitration (n 108) 26–9.
[114] Federico Ortino, ‘Investment Treaties, Sustainable Development and Reasonableness Review: A Case against Strict Proportionality Balancing’ (2017) 30(1) Leiden Journal of International Law 71; Henckels, Proportionality and Deference in Investor–State Arbitration (n 108) 22.
[115] Henckels, Proportionality and Deference in Investor–State Arbitration (n 108) 29.
[116] Certain Iranian Assets (n 6) [144].
[117] See, eg, Jarrod Hepburn, ‘Remedying Misaligned Norms in International and Constitutional Law: Investment Treaties, Property Rights and Proportionality’ [2020] UNSWLawJl 42; (2020) 43(4) University of New South Wales Law Journal 1167, 1194–5; Henckels, ‘Indirect Expropriation and the Right to Regulate’ (n 112).
[118] Certain Iranian Assets (n 6) [155].
[119] Ibid [150].
[120] Ibid [157].
[121] Federica Paddeu, Justification and Excuse in International Law: Concept and Theory of General Defences (Cambridge University Press, 2018) ch 1.
[122] Treaty between the United States of America and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investment, signed 14 November 1991, 31 ILM 124 (entered into force 20 October 1994) art XI.
[123] Certain Iranian Assets (n 6) [95]–[96].
[124] Certain Iranian Assets (Preliminary Objections) (n 21) 24 [42]. Paddeu has suggested that the Court’s reference to ‘excuse’ was significant because Iran’s pleadings did not use that language, but this appears to overlook ‘Observations and Submissions on the US Preliminary Objections Submitted by the Islamic Republic of Iran’, Certain Iranian Assets (Islamic Republic of Iran v United States of America) (International Court of Justice, General List No 164, 1 September 2017) [6.1] (‘Observations and Submissions on the US Preliminary Objections’), which states that art XX ‘provides for a potential defence on the merits by excusing conduct which would otherwise amount to a breach’: see Federica Paddeu, ‘Non‑Precluded Measures Clause: Substance or Procedure? A Comment on Certain Iranian Assets’ EJIL:Talk! (Blog Post, 6 March 2019) <https://ejiltalk.org/non-precluded-measures-clause-substance-or-procedure-a-comment-on-certain-iranian-assets>, archived at <https://
perma.cc/7UFM-PZ3N>.
[125] Certain Iranian Assets (n 6) [102] (emphasis added).
[126] Ibid [105].
[127] However, Iran elsewhere discussed whether the US measures could be ‘justified’ (‘justifié’) under art XX: ‘Verbatim Record 2022/16’, Certain Iranian Assets (Islamic Republic of Iran v United States of America) (International Court of Justice, General List No 164, 19 September 2022) 42, 44.
[128] Lori Fisler Damrosch, ‘The Legitimacy of Economic Sanctions as Countermeasures for Wrongful Acts’ (2019) 37 Berkeley Journal of International Law 249, 261; Janig and Mansour Fallah (n 20) 388.
[129] Responsibility of States for Internationally Wrongful Acts, GA Res 56/83, UN GAOR, 56th sess, 83rd plen mtg, Agenda Item 162, UN Doc A/RES/56/83 (28 January 2002) annex (‘Responsibility of States for Internationally Wrongful Acts’) (‘Articles on State Responsibility’).
[130] Victor Grandaubert, ‘Is There a Place for Sovereign Immunity in the Fight against Terrorism?: The US Supreme Court Says “No” in Bank Markazi v Peterson’, EJIL:Talk! (Blog Post, 19 May 2016) <https://ejiltalk.org/is-there-a-place-for-sovereign-immunity-in-the-fight-against-terrorism-the-us-supreme-court-says-no-in-bank-markazi-v-peterson/>, archived at <https://perma.cc/SC5B-VC49>; Janig and Mansour Fallah (n 20) 388. Nevertheless, art 49 of the Articles on State Responsibility only requires reversibility ‘as far as possible’: Damrosch (n 128) 262.
[131] See, eg, Office of the UN High Commissioner for Human Rights, ‘Iran: Unilateral Sanctions and Overcompliance Constitute Serious Threat to Human Rights and Dignity — UN Expert’ (Press Release, 19 May 2022) <https://www.ohchr.org/en/press-releases/2022/05/iran-unilateral-sanctions-and-overcompliance-constitute-serious-threat-human>, archived at <https://perma.cc/3QVD-Q7FN>.
[132] Certain Iranian Assets (n 6) [76]–[77].
[133] See, eg, Stephen M Schwebel, ‘Clean Hands, Principle’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (Oxford University Press, online at 22 April 2024).
[134] Cf the requirements of the Articles on State Responsibility (n 129) arts 49–53.
[135] Certain Iranian Assets (Preliminary Objections) (n 21) 44 [122].
[136] Certain Iranian Assets (n 6) [81]. See Jadhav (India v Pakistan) (Judgment) [2019] ICJ Rep 418, 435 [61].
[137] Certain Iranian Assets (n 6) [81]–[82].
[138] Ibid.
[139] Ibid.
[140] Cf Iran’s argument that the doctrine, if it exists, would require Iran’s violation of a ‘reciprocal obligation on which it then seeks to rely’: ‘Observations and Submissions on the US Preliminary Objections’ (n 124) [8.20].
[141] Certain Iranian Assets (n 6) [81]–[82].
[142] See Patrick Dumberry, ‘The Clean Hands Doctrine as a General Principle of International Law’ (2020) 21(4) Journal of World Investment and Trade 489, 496–8.
[143] Aryan Tulsyan, ‘Resurrecting the Clean Hands Doctrine and Mapping its History at the ICJ’, Opinio Juris (Blog Post, 6 June 2023) <opiniojuris.org/2023/06/06/resurrecting-the-clean-hands-doctrine-and-mapping-its-history-at-the-icj/>, archived at <https://perma.cc/SY8V-HV54>.
[144] Opening its discussion of the US defences on the merits, the Court recalled its ‘freedom to select the ground upon which it will base its judgment’: Certain Iranian Assets (n 6) [74]. This freedom arguably extends to being ‘able ... not only to accept one or other of ... two propositions [presented by the parties], but also to reject them both’: Free Zones of Upper Savoy and the District of Gex (France v Switzerland) (Merits) [1932] PCIJ (ser A/B) No 46, 138. See also Fisheries Jurisdiction (Federal Republic of Germany v Iceland) (Judgment) [1974] ICJ Rep 175, 181 [18]; Military and Paramilitary Activities in and against Nicaragua (Nicaragua v United States of America) (Merits) [1986] ICJ Rep 14, 24 [29] (‘Nicaragua’). Cf Alexander Orakhelashvili, ‘The International Court and “Its Freedom to Select the Ground Upon Which It Will Base Its Judgment”’ (2007) 56(1) International and Comparative Law Quarterly 171, 181.
[145] But see the recent judgment in Application of the International Convention for the Suppression of the Financing of Terrorism and of the International Convention on the Elimination of all Forms of Racial Discrimination (Ukraine v Russian Federation) (Judgment) (International Court of Justice, General List No 166, 31 January 2024) [38].
[147] This was the case following Nicaragua (n 144), Avena and Other Mexican Nationals (Mexico v United States of America) (Judgment) [2004] ICJ Rep 12 and LaGrand (Germany v United States of America) (Judgment) [2001] ICJ Rep 466.
[148] United States Department of State, ‘Judgment in Certain Iranian Assets Case’ (Press Statement, 30 March 2023) <https://2021-2025.state.gov/judgment-in-certain-iranian-assets-case/>, archived at <https://perma.cc/RBP6-FLFY>.
[149] ‘Application Instituting Proceedings’, Alleged Violation of State Immunities (Islamic Republic of Iran v Canada) (International Court of Justice, General List No 189, 27 June 2023).
[150] Notably, Tehran Hostages brought by the US: see Natalie Klein, ‘Iran and Its Encounters with the International Court of Justice’ [2021] MelbJlIntLaw 7; (2021) 21(3) Melbourne Journal of International Law 620, 633.
[151] Iran’s acceptance came only two days before filing the claim against Canada: ‘Declarations Recognizing the Jurisdiction of the Court as Compulsory: Iran, Islamic Republic of’, International Court of Justice (Web Page, 25 June 2023) <https://www.icj-cij.org/declarations/ir>, archived at <https://perma.cc/M2T5-6PXJ>.
[153] See SC Res 2231, 7488th mtg, UN Doc S/RES/2231 (20 July 2015) annex (‘Joint Comprehensive Plan of Action’).
[154] ‘Application Instituting Proceedings’, Alleged Violations of the 1955 Treaty of Amity, Economic Relations, and Consular Rights (Islamic Republic of Iran v United States of America) (International Court of Justice, General List No 175, 16 July 2018).
[155] Lisa Böhmer, ‘Russian Investors are Reportedly Contemplating Treaty Claims over Freezing of Their Assets Held by European Central Securities Depositories’, Investment Arbitration Reporter (online, 19 June 2023) <https://www.iareporter.com/articles/russian-investors-are-reportedly-contemplating-treaty-claims-over-sanctions-based-freezing-of-their-assets-held-by-european-central-securities-depositories/>.
[156] José Manuel Álvarez Zárate et al, ‘Duration of Investor–State Dispute Settlement Proceedings’ (2020) 21(2–3) Journal of World Investment and Trade 300, 309–14. However, this figure masks a large degree of variation amongst investment treaty cases. For example, some evidence suggests that the mean duration of proceedings where the amount in dispute is greater than USD1 billion (as it was in Certain Iranian Assets) is around eight years, comparable to Certain Iranian Assets: Matthew Hodgson, Yarik Kryvoi and Daniel Hrcka, 2021 Empirical Study: Costs, Damages and Duration in Investor–State Arbitration (British Institute of International and Comparative Law, June 2021) <https://www.biicl.org/documents/136_isds-costs-damages-duration_june_2021.pdf>, archived at <https://perma.cc/7FN6-CXPW> 32.
[157] Apart from claims in respect of judicial measures which might have required satisfaction of a substantive rule of ‘judicial finality’: see, eg, Balcerzak and Hepburn (n 56) 486.
[158] But see Certain Iranian Assets (n 6) [24]–[36] (Judge Robinson).
[159] Wolfgang Alschner, Investment Arbitration and State-Driven Reform: New Treaties, Old Outcomes (Oxford University Press, 2022).
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