Causation in investment tribunals refers to the issue of establishing a causative link between the state’s action and the investor’s injury, and it is crucial in the adjudication of investment claims, serving as a vital bridge between the finding of violation and the quantification of damage. As investment treaties do not define causality, arbitral tribunals have relied on the comments for Articles on State Responsibility for Internationally Wrongful Acts (the “ILC Draft Articles”) whereas some arbitral tribunals, for establishing the causative link, have examined the wrongful feature of the state’s behavior.
The use of factual causation by the Bilcon tribunal to calculate damages simplified and located the causation analysis, which had perplexed several arbitral tribunals. The tribunal’s interpretation of causality has been met with heated debate, but it has provided some order and clarity to the causation investigation. Despite the enormous stakes involved in causation concerns, investment tribunals and litigants frequently superficially address the topic, and have only recently begun to give the issue more focused attention.
How Do Investment Tribunals Determine Causation In Cases?
Investment tribunals examine if there is a causal relationship between the state’s actions and the investor’s injury to assess causality in cases. The issue of causation is a crucial component in determining damages; it can affect how cases turn out and prevent arbitrators from finishing their analysis or making an award.
Arbitral tribunals have established a two-tiered test comprising “factual causation” and “legal causation” to determine causation. On one hand, Legal causation is a method used to allocate damages resulting from unavoidable events where adjudicators believe they should most equitably fall while, on the other hand, Factual causation refers to the challenge of showing a causal link between the state’s behavior and the investor’s injury. The majority of arbitral courts now evaluate each investment loss for which an investor seeks compensation to see if a causal connection can be proven.
The Tribunal may nevertheless demonstrate causal connections for other investment losses even if the investor is unable to demonstrate a direct connection for one specific investment loss.
In Cases Where The Investor’s Injury Is Not Directly Caused By The State’s Conduct
Investment tribunals decide whether the state’s actions contributed to the investor’s injury where the state’s actions did not directly cause the investor’s injury. In these situations, tribunals must determine whether the state’s actions caused the injury or whether the injury would have happened even if the actions of the state had not taken place. The tribunal may determine that the state’s behavior caused the injury even if it wasn’t the only factor if it was a necessary condition for it to happen.
The notion that the state’s actions as a whole must cause harm has largely been accepted by investment tribunals. The relevant harm that the state’s actions must produce is frequently the devaluation of the investor’s investment unless the investor’s cause of action is a violation of the norm on expropriation, in which case the investor’s injury is the deprivation of its investment. Therefore, the investor will typically have to prove that the state’s actions caused this if causality is significant to the merits.
Investment tribunals address the question of causation in situations when the state’s actions did not directly cause the investor’s injury by examining whether those actions contributed to the injury and if they were a prerequisite for the injury to exist. The tribunal may determine that the state’s behavior caused the injury even if it wasn’t the only factor if it was a necessary condition for it to happen. If causality is pertinent to the merits, investment tribunals often require the investor to demonstrate that the state’s actions resulted in the devaluation of the investor’s investment.
Landmark Cases
The tribunal determined that Tanzania had violated the pertinent BIT in the Biwater Case, but the claimant, Biwater Gauff Tanzania, was not entitled to financial compensation as a result of those violations. The claimant had contractual rights to provide sewage and water services in Tanzania, but several events, some of which were due to the claimant, led to the complete loss of the investment’s value before Tanzania’s activities that violated the BIT. Thus, the claimant’s investment “was the subject of an expropriation by the Republic,” yet “by the time that this expropriation took place, the losses and damage for which the claimant claims in the arbitral proceedings had already been (separately) caused.”
In the case of Ponderosa Assets, L.P. v. Argentine Republic, It can also be difficult to distinguish between factual and legal analysis within the “step” of causation. It is common to distinguish between the two using the notions of “factual causation” and “legal causation,” however these names might be deceptive. Associating “fact” with one strand of the analysis and “law” with another might be problematic because if a tribunal relies on a non-legal expert to respond to a legal matter, it could be attacked for not applying the proper law. Although these beliefs have theoretical issues, it’s crucial to understand that labels can be deceptive in and of themselves.
In the but-for situation, further, possibly more unique, issues of uncertainty might potentially surface as was seen in the case of the Micula v. Romania and Chevron v. Ecuador trials where the removal of the respondent’s violation of the investment treaty in each of these cases would have had several effects on the investor’s bottom line that were difficult for the tribunal to sort out. The tribunal had to decide how it would approach this uncertainty, which in each case crossed over multiple legal orders, to resolve the “but for” scenario.
The Lemire Casearose under the bilateral investment treaty between the United States and Ukraine. It involved claims that the respondent State had repeatedly rejected bids from the claimant, a radio broadcasting investor, for new broadcasting frequencies inside of Ukraine. In a different Decision on Jurisdiction and Liability, the tribunal found that the respondent had transgressed the fair and equitable treatment clause of the treaty concerning several procedures whereby businesses other than the claimant were granted broadcasting licenses. The tribunal postponed for a second phase the discussion of the “appropriate redress” for the violation, including issues of causality and quantum.
In Bilcon v. Canada, Bilcon of Delaware and the Canadian government were at odds over the latter’s refusal to permit them to establish a quarry. The tribunal determined that the investor had proven a factual link between the harm and the state’s actions. Nonetheless, the tribunal determined that the investor had not proven a legitimate cause-and-effect relationship between the state’s actions and the harm. The tribunal rejected the investor’s allegations, ruling that Canada had not violated any of its commitments under the North American Free Trade Agreement.
In the famous Lone Star Case, the Republic of Korea and Texas-based private equity group Lone Star disagreed on how to tax Lone Star’s profits from its stake in the Korea Exchange Bank (KEB). It is the first case in which a tribunal applied the substance over form doctrine under double tax treaties and their interaction with international investment agreements (IIAs). The whole case is notable because it represents one of the most recent investment awards in tax-related investment treaty disputes and puts emphasis on how arbitral tribunals must carefully review the OECD documents to ascertain if a host state’s fiscal policies are compliant with double tax treaties and IIA investment protection requirements.
Furthermore, the tribunal determined that by failing to process the application in a timely and fair manner, the Financial Services Commission (FSC) had failed to uphold its duty to treat the claimants fairly and equally. Applying the contributory blame concept, however, the panel found that Lone Star’s deliberate unlawful behavior “materially contributed to the damage,” and without it, FSC would not have had the leverage to engage in its behavior that violates treaties.
The case is noteworthy because it demonstrates that juries are prepared to employ the contributory blame theory to establish causality in investment disputes. The fact that the case attracted a lot of media attention and incited opposition to investor-state dispute settlement (ISDS) in South Korea makes it noteworthy as well.
Factual Causation and Legal Causation In Investment Tribunals
The challenge of demonstrating a causal connection between the state’s actions and the investor’s harm is known as “cause” in investment tribunal proceedings. As already mentioned, Arbitral tribunals have established a two-tiered approach comprising “factual causation” and “legal causation” to decide such matters.
The primary focus of factual causation is demonstrating via evidence that the specific illegal act was the true source of the disputed damages. It is usually ascertained by analyzing if the harm would have happened “but for” the state’s negligent behavior. One fact that is frequently implied in the scope of work performed by damages experts is that they usually evaluate losses concerning the breaches that the claimants have asserted; in doing so, they will create the connection between a fact and a loss.
The dilemma of whether the damage is too far away or too indirect to be linked to the state’s wrongdoing is known as legal causation. It is a method for allocating losses from unavoidable incidents to domestic law cases where adjudicators believe they belong most equitably. It is not a goal that is addressed by international investment law. Due to the imprecise nature of legal causation testing, arbitral tribunals’ legal reasoning on causation issues is typically muddled.
A disagreement over the expropriation of a mining firm between Metal-Tech Ltd. and the Republic of Uzbekistan is at issue in the case of Metal-Tech Ltd. v. Republic of Uzbekistan. The Israel-Uzbekistan Bilateral Investment Treaty’s duties were judged to have been broken by Uzbekistan by the tribunal. Nonetheless, the tribunal determined that the investor had not proven a legitimate cause-and-effect relationship between the state’s actions and the harm. The tribunal determined that the investor’s misbehaviour, which played a role in the expropriation, was the reason behind its losses. According to the tribunal, the investor was not entitled to damages since their actions destroyed the causal link between the state’s actions and the injury.
Determination of Causation in Indirect Harm
It is possible to separate the harm brought about by the wrongdoing from that brought about by other causes, such as recession, by using economic techniques. Regression analysis is one such instrument for determining causality.
The question of whether there is a sufficiently close causal relationship between the alleged harm and the unlawful conduct to warrant reparations is known as legal causation. The harm must result directly from the unlawful conduct and must be caused by it, according to the commentary to Article 31 of the International Law Commission Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA).
The key to establishing factual causation is demonstrating that the specific illegal act was the direct cause of the disputed losses. Although the balance of probability standard is frequently used in practice, there is no universally accepted standard of proof in international arbitration.
Conclusion
In recent developments, it can be seen there is a more careful approach to legal causation and a stronger emphasis on factual causation in the causation methodology used by investment tribunals. Regression analysis is one economic approach that investment tribunals are increasingly employing to establish causality. The question of causality in investment law is probably going to continue to be quite difficult in the coming future. It is a need of the hour that the predictability and equity of investment arbitration should be enhanced, nonetheless, by the continued efforts of investment tribunals to create a more uniform and moral approach to causality analysis.
Author: Jay Kumar Gupta is a fourth year BBA LL.B.(Hons.) student from School of Law, Narsee Monjee Institute of Management Studies, Bengaluru
