Sanctions: a basis for trade and investment treaty claims?

Following Russia's annexation of the Crimean peninsula in March 2014, a number of countries led by the US and the EU imposed sanctions on certain Russian individuals and entities. In response, Russia imposed sanctions on food imports from all countries which had imposed sanctions on it and further banned entry into Russia of a number of EU politicians. 

Here, we look at the legality of sanctions under trade and investment agreements and what avenues might be available to businesses who find their investments or trade activities affected by sanctions. While a number of trade and investment agreements contain provisions which permit states to adopt measures and escape potential liability on the basis of national security, this is not always the case. A claim against a state may still be possible depending on the wording of the relevant agreement in place. 

Restrictions on trade

Trade sanctions, be they embargoes (i.e. prohibition on all trade) or "list-based" sanctions (which prohibit certain goods or services or trade with certain entities), are a commonly used tool in international relations. For members of the World Trade Organization (WTO), embargoes constitute quantitative restrictions and therefore are in principle banned by the various WTO agreements.¹ Most "list-based" sanctions also fall foul of these provisions. The US, Russia, Ukraine and the EU (both in its own right and each of the 28 member states) are members of the WTO. 

However, all WTO agreements allow for exceptions in relation to measures taken by a member which it (i.e. that member) considers necessary for the protection of its essential security interests.² On their face, the exceptions are rather limited in scope: they cover trade in fissionable (i.e. nuclear) materials or arms and ammunition; measures taken in time of war or other emergency in international relations; and measures in pursuance of obligations under the United Nations Charter. 

There is an important qualifier: whether a measure is "necessary for the protection of its essential security interests" is determined from the particular state's point of view (measures "it [i.e. the state] considers" necessary). A number of commentators and states (notably the US) have taken the view that each state alone is the judge of any potential threat to its essential security interests. There are no decided cases where the application of measures for the protection of security interests has been legally challenged under the WTO agreements. 

Other free trade agreements (FTAs) also contain similar exceptions on the grounds of protection of essential security interests, often in more general terms, without reference to "fissionable" materials or measures taken "in time of war". Examples include Article 29.2 of the Trans-Pacific Partnership (TPP) and Article 22.2 of the Colombia-US FTA. In the case of the Colombia-US FTA (and other recent FTAs concluded by the US), there is an express clarification³ that if a party invokes Article 22.2 in arbitral proceedings initiated by either Colombia or the US (or by an investor in relation to the investment protection provisions in the FTA), then "the tribunal or panel hearing the matter shall find that the exception applies". Where there is no such clarification, there is little by way of legal precedent on this issue. 

In 1985, when the US adopted a full trade embargo against Nicaragua, it did so on the basis of the International Emergency Economic Powers Act (IEEPA). IEEPA allows the US President to declare a national emergency to deal with an unusual and extraordinary threat to the national security, foreign policy, or economy of the United States. The measures were widely opposed and the contention that Nicaragua posed a threat to US security was criticised (including by US allies). A resolution criticising the embargo was passed by the UN General Assembly but was vetoed by the US at the UN Security Council. 

Nicaragua challenged the embargo before the International Court of Justice (ICJ) on the basis, among others, that it was in breach of the 1956 Treaty of Friendship, Commerce and Navigation between the US and Nicaragua. While the US did not participate in the proceedings at the merits stage, the ICJ did consider whether the measures were justified as "necessary to protect its essential security interests" under the wording of Article XXI(1)(d) of that treaty. The ICJ concluded that they were not. Crucially, while the ICJ heard no evidence or submissions from the US on the point, the ICJ took the view that whether a measure is necessary for the protection of essential security interests is not purely a question for the subjective judgement of the party invoking it.⁴ The US resisted any enforcement of the judgment (which included a substantial reparation award) and Nicaragua later withdrew its claim. The question therefore remains open. 

More recently, the Court of Justice of the EU (CJEU) was asked (on a reference from the English High Court) to rule on the compatibility of the EU sanctions on Russia with the 1994 EU-Russia partnership agreement. Leaving to one side the question of whether a private entity (in this case, Rosneft) has the right to rely on the provisions of the EU-Russia partnership agreement, the CJEU held that the sanctions in question were not incompatible with that agreement. The CJEU relied on an exception in Article 99(1)(d) of the EU-Russia partnership agreement which permits a party to take measures that it considers necessary for the protection of its essential security interests, particularly "in time of war or serious international tension constituting threat of war or in order to carry out obligations it has accepted for the purpose of maintaining peace and international security". While acknowledging that the Council of the EU has a broad discretion in areas which involve the making of political, economic and social choices, and in which it is called upon to undertake complex assessments, the CJEU did not stop there. It went on to consider the stated objectives of the measures as against the relevant background. This led the CJEU to the conclusion that the events that had taken place in Ukraine, a country bordering the EU, were capable of justifying measures designed to protect essential EU security interests and to maintain peace and international security, thus implying at least a certain level of scrutiny of the application by the Council of the EU of the essential security exception.⁵

Investment protection

Neither the WTO agreements nor the trade provisions (as opposed to investment protection provisions) in FTAs give individuals or entities the right to challenge state measures. Instead, aggrieved parties have to lobby their own governments to escalate the issue with the other state. 

In contrast, investors do have rights and standing to bring claims against states under investment protection provisions in bilateral or multilateral treaties (including some FTAs). Sanctions may breach a number of provisions commonly found in most investment treaties. For example, if a state takes action to freeze the assets of an investor in the state, that could amount to expropriation as it deprives the investor of the economic use and enjoyment of its investment. Likewise, trade sanctions against another state could amount to breach of an investor's legitimate expectations under the fair and equitable treatment provisions, if the ability to conduct that particular trade with that other state was the basis of the investment. Embargoes and sanctions will normally also impose restrictions on transfers of capital. A key provision in investment treaties is the ability to repatriate the original investment and returns outside of the state where the investment has taken place, without any restrictions. 

While this is not always the case, certain investment treaties do contain exceptions on the grounds of national security, along the lines of FTAs. This is notably the case for investment treaties entered into by the US. For example Article 18 of the 2012 US Model BIT expressly safeguards each party's ability to apply "measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests". This provision features in most (if not all) US BITs. While the exception on grounds of security is similar in scope to that of the WTO agreements, the wording in the US BIT is intentionally broader and allows more flexibility on the part of each party to proclaim protection of its security interests. 

Countermeasures

In certain circumstances, it is possible that measures may be justified on the basis that they constitute countermeasures. Customary international law accepts that a state will not be in breach of relevant international obligations if the measure in question is a countermeasure against another state, where:

(i) the other state itself is responsible for an internationally wrongful act; and

(ii) the countermeasure is taken in order to induce that state to comply with its obligations. 

See Articles 22, 49 and 51 of the International Law Commission's Articles on State Responsibility. 

This defence was put forward by Mexico in Archer Daniels Midland v Mexico (ICSID Case No. ARB (AF)/04/05): Mexico's measures to tax high-fructose corn syrup producers (to the benefit of Mexican sugar cane producers) was in response to alleged violations by the US of its obligations regarding Mexican sugar access to the US market under the North American Free Trade Agreement (NAFTA). While the ICSID tribunal found that such defence was in principle available to Mexico under NAFTA, the tribunal rejected it on the basis that:

(i) the tribunal had no jurisdiction to rule on whether the US measures were in breach of NAFTA in the first place; and 

(ii) in any event, Mexico did not prove that its measures were intended to induce US compliance with its obligations, nor were they proportionate or necessary and reasonably connected to the aim said to be pursued. 

By contrast, in Corn Products International v Mexico (ICSID Case No. ARD (AF)/04/01), the majority of the tribunal concluded (on similar facts) that a countermeasures defence was not in principle available. Countermeasures are directed against states. According to the majority of the tribunal, in the context of a claim by an investor, there is no room for a defence based upon the alleged wrongdoing not of the claimant investor but of its state of nationality, which is not a party to the proceedings. 

Conclusion

It is paramount to check the relevant treaty instrument to ascertain what exceptions may be allowed to the protections and rights afforded to investors. If a state is able to rely on provisions allowing for measures on the basis of national security, it will be difficult for businesses affected by embargoes and sanctions to bring claims against the state. However, ad hoc solutions may be a possibility in some instances but only if the two states agree to this, and this is quite rare. An example is the Iran-US Claims Tribunal, which was set up in 1981 to resolve the crisis in relations between the two states arising out of the November 1979 hostage crisis at the US Embassy in Tehran, and the subsequent freezing of Iranian assets by the US. The tribunal has jurisdiction to decide claims of US nationals against Iran and of Iranian nationals against the US arising out of debts, contracts, expropriations or other measures affecting property rights (as well as claims between the two states). To date, over 3,900 cases have been dealt with by the tribunal.

Notes

1. Namely GATT (General Agreement on Tariffs and Trade), GATS (General Agreement on Trade in Services) and TRIPs (Trade-Related Aspects of Intellectual Property Rights). See e.g. Art XI GATT 1994; Art XVI GATS.
2. See Article XXI GATT; Article XIV bis GATS; and Article 73 TRIPs.
3. See footnote to Article 22.2. 
4. Nicaragua v USA, judgment of 27 June 1986. 
5. Case C‑72/15 R. (on the application of OJSC Rosneft Oil Co) v HM Treasury, judgment of 28 March 2017.