ICSID Review, Vol. 32, No. 2 (2017), pp. 304-325
doi:10.1093/icsidreview/siw040   Published Advance Access March 15, 2017
ARTICLE
Does the Chorzow Factory Standard Apply in Investment Arbitration? A Contextual Reappraisal
Ronald E.M. Goodman and Yuri Parkhomenko1
Abstract—Foreign investors seeking to recover heightened damages, especially in the context of expropriation, invariably invoke Chorzow Factory to support their argument that compensation must be calculated not at the time of a wrongful act, but at the time of the award to reflect the possible rise of the value of the affected properly. This article analyzes the historical context and underlying reasoning of the Chorzow Factory's standard of damages to demonstrate that this standard cannot be automatically applied in investment arbitration for several reasons. First, Chorzow Factory stated that the rights and interests of an individual and those of a State are always in a different plane, and thus the damage suffered by an individual is never identical in kind compared to the damage suffered by a State from the same wrongful act. This suggests that the scope of recoverable damages depends on whether an alleged breach concerns the injury to a sovereign State or the injury to an investor invoking the international responsibility of a State on its own account. Second, Chorzow Factory's pronouncement about the calculation of damages at the time of indemnification was limited to the protection of complex international security and economic interests safeguarded by the Geneva Convention on Upper Silesia after the contested partition of Upper Silesia; those interests were of a different order of magnitude than the interests underlying investment protection treaties. Finally, contrary to common misconceptions, Chorzow Factory was not a paradigm case of "unlawful" expropriation under customary international law or an investment protection treaty. The case involved the seizure of properly that could not have been taken even against compensation. It is based on the distinction between different levels of illegality that Chorzow Factory also distinguished between different measures of damages, limiting its heightened standard of compensation in that case to the serious breach of the international obligations of essential importance for the maintenance of international peace and security.
I. INTRODUCTION
Modern-day foreign investors seeking to recover heightened damages invariably invoke the Chorzow Factory case, brought by Germany against Poland before the
1 Former Partner and Co-chair of International Litigation and Arbitration Department, Foley Hoag, LLP, Washington, DC. Email: rgoodman@foleyhoag.com; Senior International Associate, International Litigation and Arbitration Department, Foley Hoag, LLP, Washington, DC. Email: yparkhomenko@foleyhoag.com. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views and opinions of Foley Hoag, LLP.
© The Author 2017. Published by Oxford University Press on behalf of ICSID. All rights reserved. For permissions, please email: journals.permissions@oup.com
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Permanent Court of International Justice (PCIJ) in 1926, to support their argument that compensation must be calculated not at the time of a wrongful act, but at the time of the award to reflect the possible rise of the value of the affected property after the wrongful act. This article demonstrates that the Chorzow Factory case does not support the rote application of this approach in investment arbitration.2
II. CHORZOWS HISTORICAL AND LEGAL CONTEXT: THE AFTERMATH OF WORLD WAR I
The dispute Germany brought to the PCIJ over Poland's unlawful seizure of a factory in Chorzow was not an ordinary dispute over property rights of German nationals. Far more significant interests were at stake. It was a dispute Germany submitted in its own right, in 1926, to restore the legal regime and balance of interests established under the Geneva Convention on Upper Silesia, a convention concluded in 1922 under the aegis of the League of Nations to remove Europe from the brink of a new war.
A. The Conflict over Upper Silesia and the Threat to a Post-War European Peace
Soon after the end of World War I, when nations were still groping for a peaceful settlement, a conflict erupted between Germany and Poland over Upper Silesia. Historically a Polish territory, Upper Silesia became part of Germany in the late 18th century.3 It quickly gained strategic importance due to rich mineral deposits that powered coal, steel and chemical industries concentrated in the so-called 'industrial triangle'.4 Covering an area of only 20 miles long and 15 miles wide, it accounted for about 23 percent of German coal production, 80 percent of its zinc and 35 percent of its lead.5
The 'industrial triangle', where Chorzow with many of its factories was located, was generally considered indispensable after World War I for Germany's economic recovery and capacity to pay enormous reparations.6 It was thus not surprising that when the original draft of the Treaty of Versailles provided for the cession of
2 For other views on this issue, see Audley Sheppard, 'The Distinction Between Lawful and Unlawful Expropriation' in Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (JurisNet LLC 2006) 169; Thomas G Nelson, 'A Factory in Chorzow: The Silesian Dispute that Continues to Influence International Law and Expropriation Damages Almost a Century Later' (2014) 1(1) J Damages Intl Arb 77; Jan Paulsson, 'Ghosts of Chorzow: Maha Nunez Schultz v Republic of the Americas'' in Todd Weiler (ed), International Investment Law and Arbitration (Cameron May Ltd 2009) 777.
3 As a result of the Peace of Breslau of 1742 ending the First Silesian War (1740-42), most of Silesia was incorporated into Prussia to become the Prussian Province of Silesia, which subsequently became part of the German Empire proclaimed in 1871. See eg Tomasz Kamusella, 'Upper Silesia 1870-1920: Between Region, Religion, Nation and Ethnicity' (Winter 2004) 38 East Eur Q 4, 444.
4 E Dana Durand, 'The Upper Silesian Decision' (November 1921) 2(11) J Am Polish Chamber of Commerce and Industry 7.
5 'Correspondence with the German Delegation regarding the Terms of Peace', Foreign Relations of the United States: 1913-1921, Woodrom Wilson, The Paris Peace Conference, 1919, vol VI (US Dept of State 1946) 834; Durand (n 4) 8-12; Margaret Macmillan, Paris 1919: Six Months that Changed the World (Random House Trade Paperbacks 2003) 219.
6 In January 1921, the Inter-Allied Reparations Commission determined that the total sum due was 269 billion gold marks (2790 gold marks equaled 1kg of pure gold), about £23.6 billion, about US 832 billion (roughly equivalent to US $393.6 billion as of 2005). Macmillan (n 5) 221. See also John Maynard Keynes, The Economic Consequences of the Peace (Harcourt, Brace, and Howe 1919). On 3 October 2010, Germany paid off the last installment of interest in the amount of $94 million, which was its final reparations-related payment for World War I. C Suddath, 'Why Did World War I Just End?' Time (4 October 2010) <http://www.time.com/time/world/article/ 0,8599,2023140,00.html#ixzzlEclq4FtB> accessed 23 June 2016. On the history and law of war reparations, see Pierre d'Argent, Les reparations de guerre en droit international public. La responsabilite internationale des Etats ä l'epreuve de la guerre (Emile Bruylant 2002) 902.
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all of Upper Silesia to the reemerged Polish state, Germany vehemently opposed this plan. Ceding Upper Silesia to Poland, Germany warned, 'would endanger seriously the peace of Europe and of the World', because the loss of that territory 'would remain ... an ever-open wound, and the recovery of th[at] ... land would be ... the glowing desire of every German'.8 Germany also submitted that the cession would mean 'very severe economic disadvantages for Germany as a whole', and 'it [was] in the self-interest of the Allied and Associated Powers to leave Upper Silesia with Germany, for at the most only with Upper Silesia can Germany fulfill the obligations arising from the war, but without it never'.9
The German-Polish conflict over Upper Silesia had more than just a bilateral dimension. France, seeking to weaken Germany and to hold it in check, supported Poland.10 'A greater Poland suited French policy—and the greater the better', observed British Prime Minister Lloyd George with apprehension.11 Great Britain was seriously concerned that French plans could result in an undesirable hegemony of France in Europe; it also feared that an economically weak Germany could neither withstand the spread of Bolshevism12 nor would be able to pay its enormous reparations.13 To counteract France and prevent the undue weakening of Germany, Great Britain proposed to hold a plebiscite in Upper Silesia.14 This solution resonated with the US President Woodrow Wilson, an ardent advocate for the principle of national self-determination who also shared concerns about the French quest for dominance in Europe.15
A tug-of-war between Paris, London and Washington ended in a compromise reflected in the final text of the Treaty of Versailles. It provided that the inhabitants of Upper Silesia were 'to indicate by a vote whether they wish to be attached to Germany or to Poland'.16 The plebiscite area was subject to an occupation by the Allied and Associated Powers17 and was placed under the authority of an International Plebiscite Commission comprising four members designated by the USA, France, Britain, and Italy.18 The Commission was authorized 'to take all steps which it thinks proper to ensure the freedom, fairness, and secrecy of the vote.'19 It was also tasked to recommend a delimitation line,
7 'Treaty of Versailles: Annotations to the Text', Foreign Relations of the United States: 1913-1921, Woodrow Wilson, The Paris Peace Conference, 1919, vol XII-XIII (US Dept of State 1947) 26.
8 Correspondence with the German Delegation regarding the Terms of Peace (n 5) 835.
9 Correspondence with the German Delegation regarding the Terms of Peace (n 5) 833-4; Treaty of Versailles: Annotations to the Text (n 7) 4.
10 David Stevenson, French War Aims against Germany, 1914-1919 (Clarendon Press 1982) chs 6-7.
11 Piotr S Wandycz, France and Her Eastern Allies, 1919—1925: French-Czechoslovak-Polish Relations from the Paris Peace Conference to Locarno (University of Minnesota Press 1962) 25.
12 See Fontainebleau Memorandum of 25 March 1919 (memorandum written by the British Prime Minister David Lloyd George during the Paris Peace Conference on 25 March 1919, in which he argued in vain for a more lenient post-war settlement with Germany) in E L Woodward and others (eds), Documents on British Foreign Policy, 1919-1939, 1st Series 1919-25 (Her Majesty's Stationery Office 1944).
13 As Lloyd George stated: 'If the Poles won't give the Germans the products of the mines on reasonable terms, the Germans say they cannot pay the indemnity. Therefore the Allies may be cutting off their noses to spite their faces if they hand the mines to the Poles without regard to the question of the indemnity.' George Riddel, Lord Riddel's Intimate Diary of the Peace Conference and After 1918-1923 (Victor Gollancz 1933) 83-4; Macmillan (n 5) 221.
14 Eberhard Kolb, The Weimar Republic (Routledge 2005) 28.
15 Kay Lundgreen-Nielsen, The Polish Problem at the Paris Peace Conference: A Study of the Policies of the Great Powers and the Poles, 1918-1919 (Odense University Press 1979) 244.
16 Treaty of Versailles (signed 1919, entered into force 1920) art 88.
17 The Principal Allied and Associated Powers comprised the USA, the British Empire, France, Italy and Japan. See Treaty of Versailles: Annotations of the Text (n 7) 4.
18 Treaty of Versailles (n 16) s VIII 'Poland', annex, para 2.
19 ibid para 3.
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paying regard to 'the wishes of the inhabitants as shown by the vote, and to the geographical and economic conditions of the locality'.20
The plebiscite, preceded by two violent Polish Silesian uprisings,21 took place on 20 March 1921. But its results did not provide a clear path to an immediate solution.22 Having a comfortable majority of 707,605 votes,23 Germany claimed that Upper Silesia expressed its will to remain German. Poland, with only 479,359 votes,24 alleged the results were rigged.25 The International Plebiscite Commission, polarized between Paris and London, adopted two conflicting recommendations. The French proposal would have given the 'industrial triangle' to Poland. Great Britain and Italy proposed to leave it with Germany.26 The resulting tension exploded into a third Polish Silesian uprising in May 1921. A large portion of Upper Silesia fell under the control of Polish insurgents.
The future of Upper Silesia and the fragile peace in Europe hung in the balance. The conflict escalated to such an extent, that it was recognized as a 'circumstance ... which threaten[ed] to disturb international peace' within the meaning of Article 11(2) of the Covenant of the League of Nations.27 Invoking that provision, the Principal Allied and Associated Powers submitted to the Council of the League of Nations the question of the delimitation of the German-Polish boundary in Upper Silesia28 and requested to treat it 'as one of the greatest urgency'.29
ibid para 5.
21 In 1919, when Upper Silesia was still under German administrative control until the Treaty of Versailles' entry came into force in February 1920, the first Polish Silesian uprising broke out, but met strong German resistance. In a secret report to the German cabinet on 28 August 1919, the German Commissioner for Upper Silesia Otto Hoersing warned that the Poles might attempt to present the Allies with a fait accompli by seizing and holding Upper Silesia by force. In February 1920, an Allied Plebiscite Commission composed of British, French and Italian forces was sent to Upper Silesia. Soon, however, it became apparent that the Allied forces were too few to maintain order. Further, the Commission was torn apart by lack of consensus: Britain and Italy supported Germany, while France supported Poland. The Commission's failure to calm down the unrest paved the way for the second Polish Silesian uprising that continued throughout August 1920 until finally being brought to an end by a combination of the Allied Powers' military operations and negotiations between Germany and Poland. Richard Watt, Bitter Glory: Poland and its Fate, 1918-1939 (Hippocrene Books 1998) 215.
22 As the Council of the League of Nations noted:
The results of the plebiscite in Upper Silesia were unfortunately not of a nature to allow the frontier line to be drawn according to the wishes to the population, nor did the economic and geographical conditions of the localities give any decisive indications to show how a line should be determined. The plebiscite showed that, taking Upper Silesia as a whole, in certain districts towards the North and West, where the agricultural population is predominant, a great majority of the communes voted for Germany. In other districts, towards the South, where the inhabitants are chiefly of the agricultural and mining classes, the vote of the population was largely in favor of Poland. In an extensive territory in the Center and East, the voting was of a very confused character. Here are to be found the metallurgical and chemical works and important deposits of coal, zinc, and iron. The majority of the communes voted for Poland. Although in the big towns large majorities were recorded for Germany, these towns are encircled by the Polish voting communes. It is to be noted that, although in a sense they form a network of their own, they are partly dependent for essential raw materials on outside districts. They are situated near the extreme Eastern limit of Upper Silesia, geographically distant from the bulk of the German voting communes, though the districts which separate them from these communes are not thickly populated.
'Report by Viscount Ishii on the Request addressed by the Supreme Council of the Principal Allied Powers to the Council of the League of Nations to find a solution of the Question of Upper Silesia, adopted by the Council of the League of Nations on 29 August 1921' (December 1921) LNOJ ('Report by Viscount Ishii') 1220.
23 The Report of the Committee of Experts on the Upper Silesian Plebiscite (6 August 1921) C16101/92/18, F0371/5921.
24 ibid.
25 ibid.
26 F Gregory Campbell, 'The Struggle for Upper Silesia' (September 1970) J Mod Hist 42(3) 375-6.
27 Report by Viscount Ishii (n 22) 1220-21.
28 'Letter from the President of the Supreme Council to the Acting President of the Council of the League of 12 August 1921' (November 1921) LNOJ 982.
29 ibid.
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Seeking to achieve 'an equitable and satisfactory solution of the problem', the Council recommended that it was 'necessary to divide the industrial region of Upper Silesia'.31 However, because the region was densely populated and had an integrated industrial complex, the Council also recommended a set of measures 'to ensure the continuity of the economic and social existence of Upper Silesia'.32 One of those measures required Poland and Germany 'to recognize and respect, in the territory which shall be allotted to them, rights of all kinds—in particular, concessions and privileges acquired at the date of the partition by individuals, companies or other legal entities'.33 Poland also would have 'to renounce for a period of 15 years the powers granted by Articles 92 and 297 of the Treaty of Versailles34 as regards the expropriation of industrial undertakings, mines or deposits, save where, in the opinion of the [Upper Silesian] Mixed Commission, such powers are indispensable to ensure continued operation'.35
The Council's suggested boundary together with implementation measures were accepted immediately.36 The new boundary 'twisted and turned, dividing a chateau from its stables, a village from its cemetery, factories from their electric power, and miners from their mines.'37 Poland obtained almost half of the population but about a third of the territory,38 which, however, comprised by far the more valuable part, including Chorzow with its developed industry.39
30 ibid 1221.
31 'Recommendation of the Council of the League forwarded to the Supreme Council of the Principal Allied Powers on October 12th, 1921' (December 1921) LNOJ 1224.
32 ibid (emphasis added).
33 ibid 1230. That regime was without prejudice to Article 256 of the Treaty of Versailles which entitled States to which German territory was to be ceded to acquire all property and possessions situated therein belonging to the German Empire or to the German States, the value of such acquisitions to be fixed by the Reparation Commission, and accounted for the credit of the German Government towards the sums due to the acquiring State for reparations.
34 The provisions of Articles 92 and 297 are discussed on page 7.
35 ibid. The Upper Silesian Mixed Commission was established by the Geneva Convention of 1922. It consisted of two Germans and two Poles, from Upper Silesia, and a President of another nationality, appointed by the Council of the League of Nations.
36 'Letter from M Aristide Briand, enclosing the Decision of the Conference of Ambassadors of October 20th, 1921' (December 1921) LNOJ 1226.
37 Treaty of Versailles: Annotations of the Text (n 7) 215 art 88. For the description of the frontier see Letter from M. Aristide Briand (n 36) 1226.
38 Poland acquired 965,000 inhabitants out of 1,950,000 and 1255 square miles of territory out of 4265 square miles. See M Epstein (ed), Annual Register for 1921, vol 163 (Longmans, Green, and Co 1922), 180-81.
39 Epstein (n 38), 180-81: 'Of 61 coal mines 49% fell to Poland, Germany losing 3 mines out of 4. Of a coal output of 31,750,000 tons, 24,600,000 tons fell to Poland. Of 37 furnaces, 22 went to Poland. Of a pig-iron output of 570,000 tons, 170,000 tons remained German, and 400,000 tons became Polish. Of 16 zinc and lead mines, which produced 233,000 tons in 1920, only 4 with an output of 44,000 tons remained German.'
See also George A Finch, 'Editorial Comment: Upper Silesia' (1922) 16 AJIL 75, 78-79.
The Editorial Comment gave the following account of economic consequences of the partition of Upper Silesia: [i]n 1913 the mines in Upper Silesia which are now assigned to Poland produced approximately 32,500,000 tons of coal, and those now assigned to Germany approximately 10,500,000 tons, the output for the whole area being valued at $75,000,000 annually. The total production of coal in Germany in the same year, excluding Alsace-Lorraine and the Saar Basin, was 174,000,000 tons, of which the production in the territory now assigned to Poland constituted 19 per cent. The pre-war production of coal in the present territory of Poland, exclusive of Upper Silesia, was about 9,000,000 tons, so that the production of Poland will be multiplied about four times by the decision. Since the pre-war consumption amounted to about 18,000,000 tons, it is evident that Poland will now have a considerable surplus of coal for exportation. The production of pig iron in Upper Silesia in 1913 was 995,000 tons, valued at about $15,000,000 and representing about 6 per cent of the aggregate production of Germany in its then existing boundaries. Approximately all of the iron ore mines lie in territory which has been allotted to Poland. Of the total number of blast furnaces in Upper Silesia immediately preceding the war, twenty-two were in territory now assigned to Poland and fourteen in that assigned to Germany. Of the eight principal iron and steel works, five are now in Polish territory. While the iron and steel production of the Upper Silesian territory which was passed to Poland constitute a comparatively small faction of the total German output, it represents a very great increase in the Polish iron and steel industries, which, in 1913, had a production of 641,000 tons. The output of raw zinc of Upper Silesia, amounting to nearly $20,000,000 per year, in 1912 was 168,600 tons, which represented about five-eighths of the total production of Germany, more than one-sixth of the world production, and was equal roughly to three-fifths of the production of
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Neither Germany nor Poland was happy with the result. Nonetheless, they were pushed to enter into an agreement with a special legal regime to govern questions arising from the partition of Upper Silesia.41 Negotiations were conducted in Geneva under the aegis of the League of Nations.42 On 15 May 1922, the two States signed 'a dictated agreement'43—the Geneva Convention on Upper Silesia. By the end of May, the Polish Sejm and the German Reichstag, which was draped in mourning cloth for the occasion,44 ratified the Convention. It entered into force on 15 June 1922. In two weeks, Poland extended its authority over the whole of the newly acquired portion of Upper Silesia.45
B. A Fragile Peace: The Legal Regime of the 1922 Geneva Convention on Upper Silesia
The Geneva Convention on Upper Silesia was a unique treaty for unique circumstances. Professor G S Kaeckenbeeck, the former President of the German-Polish Mixed Arbitral Tribunal, observed that the Convention was 'an international novelty, an experiment—in the full force of the word—in treaty-making, in international organization, and in treaty-sanctioning, and threw new light on problems of succession, the international protection of individual rights, the international protection of minorities, on change of nationality, on the possibilities of technical cooperation between States in running vital public services'.46 Consisting of 606 articles, the Geneva Convention was by far the largest international legal instrument at the time, eclipsing even the Treaty of Versailles that had just 440 articles. This alone underscores the complexity of problems the parties had to resolve.
the United States. The value of Upper Silesian production of lead with its by-products amounted before the war to nearly $3,500,000 per year. Practically the entire zinc and lead industry of Upper Silesia has passed to Poland.
40 The Polish Prime Minister reacted to that decision as follows: 'The Polish Government is confronted with the unfortunate necessity of acknowledging that the decision, far from satisfying the rightful claims of Poland, has brought disappointment and shall not be marked with the days of rejoicing which the Poles had hoped for.' Durand (n 4) 22.
In the sitting of the Reichstag, the German Chancellor made a speech at the end of which he expressed the views of his Cabinet in the following declaration:
The German Government sees in the territorial and economic dictates of the Entente not only an injustice which the German people has no power to oppose, but also an infringement of the Treaty of Versailles, an upsetting of the decision arrived at in Geneva and accepted by the chief Allied Powers. Against this injustice with the situation which it creates the German Government makes the most solemn protest in the name of international law, the shield of the oppressed. It is only on account of the threats expressed in the note, and the desire to avoid as far as possible the misery which would otherwise light upon the Upper Silesian industrial district that the German Government consents to nominate the delegates as required by the dictate of the Powers, without thereby abandoning its previous standpoint.
Epstein (n 38) 180-81.
41 Letter from M Aristide Briand (n 36) 1231.
42 'Rules of Procedure of the Germano-Polish Conference on the Convention provided for by the Allied Powers in their Decision, dated October 20th, 1921' (January 1922) LNOJ 53; 'Germano-Polish Negotiations for the Establishment of the Economic Convention provided for in the Decision of the Conference of Ambassadors of October 20th, 1921' (January 1922) LNOJ 117.
43 Georges S Kaeckenbeeck, The International Experiment of Upper Silesia: A Study in the Working of the Upper Silesian Settlement, 1922-1937 (OUP 1942) 10-12.
44 Campbell (n 26) 385.
45 M Epstein (ed), The Annual Register: A Review of Public Events at Home and Abroad for the Year 1922, vol 164 (Longmans, Green, and Co 1923) 193.
46 Georges S Kaeckenbeeck, 'Upper Silesia Under the League of Nations' (January 1946) 243 Am Acad Pol Soc Sei, annals 129-133; Georges S Kaeckenbeeck, 'The Character and Work of the Arbitral Tribunal of Upper Silesia' (1935) Trans Grotius Society 27-44.
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The object of the Convention was also unique: 'to guarantee in the common interest the continuity of the economic life of Upper Silesia and the protection of minorities'.47 For that purpose, it laid down an elaborate legal regime that governed diverse, but interrelated, issues such as rights of minorities, change of nationality, distribution of water and electricity, monetary issues, post, telegraph and telephone services, mining, and railway communications.
Those substantive provisions were backed up by a complex dispute settlement mechanism. The Upper Silesian Mixed Commission was set up to consider economic or administrative disputes between the Polish and German governments.48 The Arbitral Tribunal was vested with jurisdiction to adjudicate private claims for breach of rights acquired before the partition of Upper Silesia49 and to give binding interpretations of the Convention upon referral by the German or Polish governmental authorities.50 Both dispute resolution bodies were complementary to the German-Polish Mixed Arbitral Tribunal51 and the Permanent Court of International Justice.52
An integral part of the Geneva Convention was a legal regime that guaranteed the protection of vested rights and imposed a strict prohibition on the liquidation of property of German nationals. Whether Poland would be entitled to liquidate such property in the Polish part of Upper Silesia had been one of the thorniest questions during the negotiations of the Convention. Over Germany's objections, Poland argued it had this right under Articles 92 and 297 of the Treaty of Versailles. Article 297 allowed any Allied or Associated Power (a 'Power') to retain and/or liquidate property, rights and interests of German nationals, or companies controlled by German nationals, 'in accordance with the laws of the [Power] concerned'.53 Article 92 qualified Article 297 with respect to property belonging to German nationals in territories transferred to Poland under the Treaty of Versailles by providing that such property could not be liquidated except in accordance with the following conditions: (i) the proceeds had to be paid directly to the German owner,54 and (ii) if, upon the application of the German owner, the conditions of the sale were adjudged by the German-Polish Mixed Arbitral Tribunal to have unfairly caused the resulting sale price to be too low, that Tribunal had the discretion to order the Polish Government to pay the owner 'equitable compensation'.55
Preamble of the Geneva Convention between Germany and Poland on Upper Silesia of 1922 ['Deutschpolnisches Abkommen über Oberschlesien vom 15 Mai 1922' (1922) Deutsches Reichsgesetzblatt, Teil 2] 245.
48 See the Geneva Convention of 1922 (signed 1929, entered into force 1931) arts 2, 7, 12, 165, 170, 215, 237, 312, 335, 367, 379, 394, 499, 556.
49 Geneva Convention of 1922 (n 48) art 5.
50 Geneva Convention of 1922 (n 48) art 588.
51 Art 304(a) of the Treaty of Versailles provided for establishment of a Mixed Arbitral Tribunal between each of the Allied and Associated Powers on the one hand and Germany on the other hand. Each such Tribunal had to consist of three members: two appointed by each of the Governments concerned and the President chosen by agreement. The scope of its jurisdiction was defined in art 304(b) of the Treaty of Versailles.
52 The PCIJ is agreed in art 23 of the Geneva Convention to be a forum for the resolution of disputes regarding the interpretation and application of arts 6-22 of the Convention, which fall within the section of the Convention entitled 'Expropriation.'
53 The value of such property was not paid to the owner but credited to Germany as reparations. Article 297(i) of the Treaty of Versailles provided that Germany was to compensate its nationals for the sale or retention of 'their property, rights or interests in Allied or Associated States.' Article 297 required no reason to be given for retention and/or liquidation.
54 Treaty of Versailles (n 16) art 92(1).
55 Treaty of Versailles (n 16) art 92(2).
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Under the Treaty of Versailles, Poland would thus have had the blanket right to retain or liquidate property of German nationals in Upper Silesia. However, after concluding the Geneva Convention, Poland had to renounce that right for a period of 15 years,56 a right which it would then regain for two years and thereafter lose forever. The Convention set forth a lex specialis regime on expropriation and liquidation of German property embodied in Articles 6 to 24. Specifically, Article 6 prohibited liquidation of the property, rights, and interests of German nationals or of companies controlled by German nationals in Polish Upper Silesia.57 It only carved out for Poland a very narrow, contingent right to request permission from the Upper Silesian Mixed Commission to expropriate major industrial undertakings and large rural estates of German nationals or corporations controlled by German nationals subject to the requirements set forth in Articles 7 to 23 of the Convention.58 Article 7 specified that, during fifteen years from the date of acquiring sovereignty over Polish Upper Silesia, expropriation could be permitted only after the determination by the Upper Silesian Mixed Commission that the measure was 'indispensable' to ensure the continuation of the exploitation of such undertakings.
This was consistent with the Convention's object and purpose, as expressed in its preamble, 'to guarantee in the common interest the continuity of economic life in Upper Silesia'.60 Absent the Upper Silesian Mixed Commission's express determination that the measure was indispensable for that purpose, any purported expropriatory measure would become a categorically prohibited liquidation.
III. THE FACTORY AT CHORZOW CASE AND THE PRINCIPLE OF FULL REPARATION
The legal regime of the Geneva Convention was challenged the very next day after the Convention's entry into force. Without waiting for the final transfer of sovereignty over the relevant portion of Upper Silesia, Poland extended to the new area laws that liquidated the factory at Chorzow, one of the largest operating nitrate factories in Europe at the time. It gave rise to a flurry of legal actions by both private entities and Germany.
56 Letter from M Aristide Briand (n 36) 1230.
57 Geneva Convention of 1922 (n 48) art 6.
58 ibid.
59 Geneva Convention of 1922 (n 48) art 7. After 15 years from the date of acquiring sovereignty over the Polish Upper Silesia, the requirement to obtain the Upper Silesian Mixed Commission's approval was removed by art 8, and Poland would be entitled to expropriate under arts 92 and 297 of the Treaty of Versailles, at its own discretion, subject, however, to notifying the owner of its intention to do so as prescribed in art 10 of the Convention. Under that provision any notification of an impending expropriation was to be made between 1 July 1937 and 1 July 1939 and the expropriation had to be completed within 4 years of the notification. If the notification was not made in the two year period and a notified expropriation was not effected within 4 years, then expropriation was entirely prohibited; in other words, there would be no further right to expropriate. See the Geneva Convention of 1922 (n 48) arts 8, 10.
While not explicitly stated in the Convention, it would appear logical that for the Upper Silesian Mixed Commission to adjudge that an expropriatory measure would be 'indispensable' for the continued exploitation of a large German-owned enterprise, such enterprise (i) would have to be in danger of cessation, for example, because of impending bankruptcy; and (ii) the Polish expropriatory measure would actually be such as to enable such enterprise to continue its activities in different hands. In the event such approval would be given, the methods of sale and valuation would be as fixed in Poland's legislation but if the conditions of the sale or measures taken by the Polish Government were 'unfairly prejudicial to the price obtained', the only redress for that wrongful conduct was merely 'equitable compensation' payable by the Polish Government on the basis of an award by the German-Polish Mixed Arbitral Tribunal. Treaty of Versailles (n 16) art 92 (emphasis added).
60 Preamble of the Geneva Convention of 1922 (n 48).
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Germany brought its claims before the PCIJ, which evolved into a series of cases.61 Two of them are relevant to the present discussion. In Certain German Interests in Polish Upper Silesia ^Certain German Interests'),62 the Court established that Poland had breached the Geneva Convention. In Factory at Chorzow ('Chorzow'),63 the case dealing with the nature, amount and method of payment of compensation, the Court for the first time formulated the principle of full reparation.64
Chorzow was 'an unusual decision' and its statement on reparation was 'an exceptional rule'65 linked to the character of international obligations, sensitive interests protected by the Geneva Convention, and the gravity of breaches established in Certain German Interests. These two cases therefore need to be analyzed together to understand the real reasons underlying the Court's pronouncement on full reparation. The close relationship between the two cases and their historical context may have been overlooked. This may have clouded the meaning and purpose of the PCIJ's ruling and given rise to the reference by claimants and investor-State tribunals to a 'Chorzow standard' which may not, however, be applicable to investor-State cases.
A. The Certain German Interests Case and the PCIJ's Decision on Poland's International Responsibility
The Certain German Interests case concerned, in relevant part, Poland's liquidation of the working nitrate factory at Chorzow.66 The dispute arose from the following facts. On 5 March 1915, the Chancellor of the German Empire, on behalf of the State, concluded with the German company Bayerische Stickstqffwerke A.G ('Bayerische') a contract under which the latter undertook to establish, construct and manage a nitrate factory at Chorzow in Upper Silesia (German territory at the time). The necessary lands were to be acquired on behalf of the State and entered in its name in the land register.
On 24 December 1919, a new German company, Oberschlesische Stickstqffwerke A.G. ('Oberschlesische'), was established with a share capital of 250,000 marks, which subsequently increased to 110 million marks. In a contract of that date (the '1919 Contract'), Germany sold to Oberschlesische the factory at Chorzow together with its land, buildings, installations, all accessories, reserves, raw material, equipment and stocks. On 29 January 1920, Oberschlesische was entered in the Chorzow land register as owner of the property constituting the nitrate factory of Chorzow.
On 24 December 1919, Germany and Oberschlesische also entered into another contract (the 'Treuhand Contract') to establish a German company (the Stickstoff Treuhand Gesellschaft m.b.H., 'Treuhand'), which became the sole shareholder of
61 Case Concerning Certain German Interests in Polish Upper Silesia (Preliminary Objections), PCIJ, Judgment 6 (25 August 1925) PCIJ Rep Series A No 6; Case Concerning Certain German Interests in Polish Upper Silesia (Merits), PCIJ, Judgment (25 May 1926) PCIJ Rep Series A No 7; Case Concerning the Factory at Chorzow (Claim for Indemnity) (Jurisdiction), Judgment (26 July 1927) PCIJ Rep Series A No 9; Case Concerning the Factory at Chorzow (Indemnities), Order on Interim Protection (21 November 1927) PCIJ Rep Series A No 12; Interpretation of Judgments Nos 7 and 8 (the Chorzow Factory), Judgment 11 (16 December 1927) PCIJ Rep Series A No 13; Case Concerning the Factory at Chorzow (Claim for Indemnity) (Merits), Judgment 13 (13 September 1928) PCIJ Rep Series A No 17.
62 Certain German Interests in Polish Upper Silesia (Merits), Judgment (25 May 1926) PCIJ Rep Series A No 7.
63 Factory at Chorzow, Judgment 13 (n 61).
64 Georg Schwarzenberger, International Law (Stevens & Sons 1957) vol, 1 653; Christine Gray, Judicial Remedies in International Law (Clarendon Press 1990) 78-79.
65 Gray (n 64) 80.
66 Judgment 6 (n 61) 5. The case also concerned the notice by Poland to the owners of certain large agricultural estates of the intention to expropriate their properties. This second aspect of the case is not relevant to this discussion.
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Oberschlesische. As guarantee for 110 million marks owed to Germany under the Treuhand contract, Treuhand undertook to obtain for the State a lien on all of its shares in Oberschlesische.67 While holding the lien on those shares, Germany had authority to exercise all the rights resulting from the possession of the shares, and in particular the right to vote at the general meeting of shareholders, although the management of the factory was left in the hands of Bayerische.68
On 16 June 1922, the day after the Geneva Convention entered into force, Poland, as previously noted, extended to Polish Upper Silesia the Law Concerning the Transfer of the Rights of the German Treasury and Members of Reigning German Houses to the Treasury of the State of Poland of 14 July 1920 (the 'Polish Act'). The Polish Act was premised on the Treaty of Versailles' Article 256, which entitled the States to which German territory was ceded to acquire all property and possessions belonging to the German Empire or to the German States.69 Specifically, Article 1 of the Polish Act provided that, in cases where 'the Crown, the German Reich, the States of Germany, institutions of the Reich or States of Germany, the ex-Emperor of Germany, or other members of reigning houses, are or were entered after 11 November 1918, in the land registers of the former Prussian provinces—either as owners or as possessors of real rights—the Polish Courts shall, on the basis of the Treaty of Peace of Versailles of 28 June 1919, in place of the above-mentioned persons or institutions, automatically enter the name of the Polish Treasury in these registers'.70 In their turn, Articles 2 and 5 of the Polish Act also negated a transfer or sale of property by Germany (such as to Oberschlesische) and authorized the eviction of persons who had been the buyers or transferees.71
Based on those provisions, the Polish Court, on 1 July 1922, declared the registration of Oberschlesische as the owner of the factory null and void (meaning that it considered that Germany was still the actual owner) and ordered the right of ownership in the landed property in question to be registered in the name of the Polish Treasury.72 On 3 July 1922, two weeks after the entry into force of the
67 Judgment 13 (n 61) 20.
68 Judgment 13 (n 61) 20-21.
69 The relevant parts of art 256 of the Treaty of Versailles read:
Powers to which German territory is ceded shall acquire all property and possessions situated therein belonging to the German Empire or to the German States, and the value of such acquisitions shall be fixed by the Reparation Commission, and paid by the State acquiring the territory to the Reparation Commission for the credit of the German Government on account of the sums due for reparation.
For the purposes of this Article the property and possessions of the German Empire and States shall be deemed to include all the property of the Crown, the Empire or the States, and the private property of the former German Emperor and other Royal personages.
70 Case Concerning Certain German Interests in Polish Upper Silesia (The Merits) (n 61); Factory at Chorzow (Claim for Indemnity) (Merits), Judgment 7 (25 May 1926) PCIJ Rep Series A, No 7 23-24.
71 Art 2(1) of the Polish Act reads:
Should any of the above-mentioned persons or institutions have, after November 11th, 1918, either alienated or charged the landed property in question, or should a real right, registered in the name of the aforesaid persons or institutions, have been, after November 11 th, 1918, either at their request or with their consent, ceded, struck out or modified in any way, the Court shall restore the entry in the land registers to the situation which would have existed if the aforesaid persons or institutions had not made any request or given the consent necessary to effect the changes in the registers.
Art 5 reads:
The Polish Treasury, having been entered in accordance with Article 1, as owner of a landed property, may require the eviction of persons who, as a result of a contract concluded with one of the persons or institutions mentioned in Article I, remain in occupation of such property after the coming into force of this law.
Factory at Chorzow, Judgment 7 (n 70) 23-24.
72 The effect of the Polish Court's declaration was to attempt to make the Chorzow factory property of the German State and thus to avoid the application of the Convention's prohibition on liquidation of property owned by German nationals (eg Oberschlesische).
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Convention, Poland seized the factory with all movable property, patents, and licenses, and took over the management.73
In response, Oberschlesische and Bayerische brought an action before the German-Polish Mixed Tribunal and a parallel civil action before the Polish Court.74 Germany, invoking the compromissory clause in Article 23 of the Geneva Convention,75 instituted proceedings before the PCIJ to obtain a declarative judgment that Poland had breached Article 6 and the related articles of the Geneva Convention.76
Before determining whether Poland had breached its obligations under the Geneva Convention, the PCIJ addressed the procedural and substantive aspects of the applicable legal regime. From a procedural perspective (which the Court called a 'question of form'), the Court emphasized that the Convention laid down a certain procedure to ascertain whether a property to be expropriated was in fact permitted to be expropriated.77 That procedure was violated by the Polish Act, the Court held, because (i) it had automatic application, without any investigation as to the title of ownership or validity of each transfer or contract; (ii) it had declared null and void any alienation or creation of real rights, without regard to the nature or circumstances of the transaction; (iii) it had authorized the Polish Treasury to annul automatically any contract concluded with the persons and institutions associated with the German Crown, Reich and the States of Germany; and (iv) had provided neither redress by legal action to interested parties, nor indemnification.78
73 After having taken over the factory, Poland entered it in the list of property transferred to it under Article 256 of the Treaty of Versailles, a list that was then passed along to the Reparations Commission.
74 On 15 November 1922, Oberschlesiche had brought an action before the German-Polish Mixed Arbitral Tribunal in Paris, claiming, inter alia, that the Polish Government should be ordered to restore the factory. This action was withdrawn by Oberschlesische in June 1928, before the Tribunal had been able to give a decision. On 24 November 1924, Oberschlesische instituted a parallel action in regard to the movable property existing at Chorzow at the time of the taking over the factory, against the Polish Treasury before the Civil Court of Katowice, with a view to obtaining either the restitution to Oberschlesiche or Bayerische of such property, or the payment of the equivalent value. This parallel action, however, led to no decision on the merits.
Bayerische company brought an action on 25 March 1925 before the German-Polish Mixed Arbitral Tribunal with a view to obtain an annual indemnity until the restitution of the factory to the Oberschlesische, and to restore to it the management of the factory. But the case was withdrawn in June 1928 at the same time as the action brought by the Oberschlesische and in the same circumstances. See Judgment 13 (n 61) 23.
75 The jurisdiction of the Court was based on art 23 of the Convention that applied only to divergences of opinion resulting from the interpretation and application of arts 6 to 22, ie the liquidation provisions of the Geneva Convention. For a more detailed discussion of the jurisdictional issues, see Judgment 6 (n 61).
76 Germany's final request for relief petitioned the Court to give judgment to the following effect:
(1) That the application both of Article 2 and of Article 5 of the law of July 14th, 1920, in Polish Upper Silesia, decreed by the law of June 16th, 1922, constitutes a measure of liquidation within the meaning of Article 6 and the following articles of the Convention of Geneva in the sense that, in so far the above-mentioned articles of the Convention of Geneva authorize liquidation, that application must be accompanied by the consequences attached to it by the said Convention, in particular the entry into operation of Articles 92 and 297 of the Treaty of Versailles prescribed by the said Convention, and that, in so far as those articles do not authorize liquidation, that application is illicit.
(2) (a) That the attitude of the Polish Government in regard to the Oberschlesische Stickstoffmerke and Bayerische Stickstoffmerke was not in conformity with Article 6 and the following articles of the Geneva Convention;
(b) Should the decision in regard to point (a) be in the affirmative, the Court is requested to state what attitude should have been adopted by the Polish Government in regard to the Companies in question in order to conform with the above-mentioned provisions.
See Judgment 7 (n 70) 12.
77 Judgment 7 (n 70) 22. The Court explained that such procedure was of great importance to attain the purpose of the Convention—'to guarantee, in the interests of all parties, the continuity of economic life is Upper Silesia' (emphasis added). The Court concluded that:
... if the principle of the preliminary enquiry is accepted for the case of an expropriation in the form intended by [the Geneva Convention], this seems to imply that, independent of that form, there may be no dispossession of property unless it be established by preliminary enquiry that the Geneva Convention is not applicable.
Judgment 7 (n 70) 23 (emphasis added).
78 ibid 24. The Court held that the application of the Polish Act in Upper Silesia was not compatible with the expropriation regime established by the Geneva Convention for two main reasons:
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From a substantive perspective, the Court noted that the expropriation allowed under the Convention would be an exception to the 'general principle of respect for vested rights' and that 'subject to the provisions authorizing expropriation', the treatment of German private property, rights and interests in Polish Upper Silesia was 'to be the treatment recognized by the generally accepted principles of international law'.79 The Court stressed that it regarded the type of expropriation permitted under the Convention, as a ''derogation from the rules generally applied in regard to the treatment of foreigners and the principles of respect of vested rights', and continued that:
As this derogation itself is strictly in the nature of an exception, it is permissible to conclude that no further derogation is allowed. Any measure affecting the property, rights and interests of German subjects covered by Head III of the Convention, which is not justified on special grounds taking precedence over the Convention, and which oversteps the limits set by the generally accepted principles of international law, is therefore incompatible with the regime established under the Convention.80
The Court thus considered the Geneva Convention, which was intended to 'guarantee, in the interests of all parties, the continuity of economic life in Upper Silesia',81 and its expropriation regime as sui generis, not relating to conventional expropriation and a derogation from rules generally applicable under international law in regard to the treatment of foreigners and the principles of property rights.
At the same time, the Court also stressed that 'expropriation for reasons of public utility, judicial liquidation and similar measures [were] not affected by the Convention'.82 Had Poland argued that its taking of the Chorzow factory was an ordinary expropriation for 'reasons of public utility'—the type of expropriation normally at issue before investment arbitration tribunals—the Court's characterization of wrongfulness and standard of damages would no doubt have been different in that case, as discussed in the next section.83
B. The Chorzow's Decision on the Principle of Full Reparation
Following the judgment in Certain German Interests, Germany and Poland sought to negotiate the amount of compensation. When their negotiations failed, Germany again had to turn to the Court. Because the factory in its condition at the time of the negotiations no longer corresponded to the factory as it had been when the wrongful act occurred in 1922, Germany abandoned
On the one hand, these articles may affect private property and withdraw it from the protective regime instituted by Articles 6 to 22, subjecting it to more serious measures prohibited by the Convention. On the other hand, they make no provision for any investigation concerning the validity of a title, and eliminate any previous investigation of an individual case, though such investigation is necessary for a correct application of the Convention.
ibid 24.
79 ibid 21.
80 ibid 22.
81 ibid.
82 ibid (emphasis added).
83 By contrast, Poland only made a sustainable argument that it was entitled to liquidate the Chorzow factory under art 256 of the Treaty of Versailles. Judgment 7 (n 70) 27-31, 81.
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its original claim for restitution.84 Reparation thus had to take the form of compensation.
In Chorzow, the Court dealt with three questions: (i) the obligation to make reparation, (ii) the existence of damage as the basis for indemnification, and (iii) the extent of payable damages.
Answering the first question, the Court affirmed the principle of international law that 'any breach of an engagement involves an obligation to make reparation'.86
Addressing the second question, the Court reiterated the principle that 'in estimating the damage caused by an unlawful act, only the value of property, rights and interests which have been affected must be taken into account'.87 This reflected the view that actual loss is a necessary condition for the award of damages.88
The third question required the Court to lay down for the first time 'the guiding principles according to which the amount of compensation due may be determined'.89 At the outset, the Court emphasized that Poland's conduct was not an expropriation; it was 'a seizure of property, rights and interests which could not be expropriated even against compensation, save under the exceptional conditions fixed by Article 7 of the said Convention'.90 As a result, the reparation in that case was 'the consequence not of the application of Articles 6 to 22 of the Geneva Convention, but of acts contrary to those articles'.91 Accordingly, the Court concluded, the compensation due to the German Government was 'not necessarily limited to the value of the undertaking at the moment of dispossession, plus interest to the day of payment'.92 That limitation would have only been admissible if Poland 'had had the right to expropriate^ and if its wrongful act had 'consisted merely in not having paid ... the just price of what was expropriated'.93 In that case, 'such a limitation might result in placing Germany and the interests protected by the Geneva Convention ... in a situation more unfavorable than that [in which they] would have been if Poland had respected the said Convention'.94 It would not only have been unjust, in the Court's opinion, but also incompatible with the aim of the Convention—'the prohibition, in principle, of the liquidation of the property, rights and interests of German nationals and of companies controlled by German nationals in Upper Silesia'—since it would have been 'tantamount to rendering lawful liquidation and unlawful dispossession indistinguishable in so far as their financial results are concerned'.95 The Court then pronounced what has become
84 Case Concerning the Factory at Chorzow (Claim for Indemnity) (Jurisdiction), Judgment 8 (13 September 1928) PCIJ Rep Series A No 9 17.
85 ibid. It is to be noted that the reparation claims were brought in Germany's capacity as a contracting party to the Geneva Convention and did not constitute an espousal of claims of Oberschlesische and Bayerische. As Germany emphasized before the Court:
The present dispute is therefore a dispute between governments and nothing but a dispute between governments. It is very clearly differentiated from an ordinary action for damages, brought by private persons before a civil court. Judgment 13 (n 61) 25.
86 Judgment 13 (n 61) 29.
87 ibid 31.
88 ibid 31-40.
89 ibid 46.
90 ibid.
91 ibid.
92 ibid 47 (emphasis added).
93 ibid (emphasis added).
94 ibid. One should recall that had Poland respected the Convention, it would have needed the consent of the Upper Silesian Mixed Commission, and if such consent would have been given, then compensation would have been assessed according to Polish legislation and subject to an appeal for 'equitable compensation' to the German-Polish Mixed Arbitral Tribunal. See Treaty of Versailles arts 92(1) and 92(2).
95 Judgment 13 (n 61) 47.
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the most quoted statement on the consequences of conduct contrary to international law:
... reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which restitution in kind would bear, the award, if need be, of damages for loss sustained which would not be recovered by restitution in kind or payment in place of it - such are the principles which should serve to determine the amount of compensation due for an act contrary to international law96
The Court then stated that its conclusion 'particularly applies as regards the Geneva Convention, the object of which is to provide for the maintenance of economic life in Upper Silesia on the basis of respect for the status quo'.97 In light of the specific object of the Convention, the Court stated that:
The dispossession of an industrial undertaking - the expropriation of which is prohibited by the Geneva Convention - then involves the obligation to restore the undertaking and, if this be not possible, to pay its value at the time of the indemnification, which value is designed to take the place of restitution which has become impossible.98
The authority of these newly minted 'guiding principles' was questioned immediately in two dissents and separate opinions, which are discussed below."
Ironically, the Court had no occasion to apply these principles to the facts of the case, because Germany and Poland settled damages100 and requested that the proceedings in Chorzow Factory be terminated.101
Thus, the curtain in the Chorzow drama finally dropped, but the obiter dictum understood to have pronounced a generally recognized 'standard' of damages may have opened the door to many future, arguably inapt, pronouncements of that standard in investor-State arbitration.
IV. CHORZOW S STANDARD OF DAMAGES AND EXPROPRIATION CLAIMS UNDER INTERNATIONAL INVESTMENT AGREEMENTS
It is impossible to establish how the PCIJ intended to apply its standard of damages in practice. However, it is possible, based on the described circumstances
96 ibid (emphasis added).
97 ibid (emphasis added).
98 Judgment 13 (n 61) 47-48 (emphasis added).
99 See Judgment 13, Dissenting Opinion by Lord Finlay; Judgment 13, Dissenting Opinion by M Ehrlich; Judgment 13, Observations by M Nyholm; Judgment 13, Observations by M Rabel.
100 On 12 November 1928, an agreement was reached between the Polish Treasury and Oberschlesische and Bayerische on the amount of compensation to be paid by Poland. Under Article 3 of the agreement, Bayerische granted Poland the right to use its patents and other right in the factory at Chorzow as they existed on 30 June 1922. Poland undertook in Article 4 an obligation to pay Bayerische three million Reichsmarks valued as of 1 April 1928. Under art 5, Oberschlesische was entitled to receive 25 million Reichsmarks valued as of 1 April 1928. Art 9 provided that the settlement agreement would serve as a basis for terminating the pending proceedings on damages before the PCIJ. See Agreement between the Polish Treasury and Bayerische and Oberschlesische of 12 November 1928, Auswaertiges Amt, Politisches Archiv, R264457 (Abt IV Oberschlesien, Rechtswesen 19, Chorzow, Bd 5). Based on that agreement, Germany and Poland exchanged diplomatic notes on 27 November 1928 declaring that 'as regards the Chorzow case, no further difference of opinion exists as between the German Reich and Poland,' and agreeing that 'the suit now pending before the Permanent Court of Justice at The Hague will be withdrawn as having no further purpose.' See the Diplomatic Notes exchanged between Germany and Poland; see also Case Concerning the Factory at Chorzow (Indemnities), Order of the Court made on 25 May 1929, PCIJ Rep Series A No 19.
101 Order made on 25 May 1929 (n 100).
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of the case, to conclude that Chorzow is 'an unusual decision' that adopted 'an exceptional rule.'102 Consequently, any indiscriminate application of the rule in the context of investor-State arbitration would seem problematic.
Foreign investors seeking to recover heightened damages, especially in the context of expropriation, invariably invoke Chorzow's standard of damages by advancing an argument that a breach of the expropriation clause of a bilateral investment treaty (BIT) by reason of failure to meet the expropriation requirements listed in the BIT is a wrongful act that renders that BIT's own standard of compensation inapplicable. The argument then follows that, under Chorzow the compensation need not be limited to the value of property at the moment of dispossession, plus interest to the day of payment, as provided under the BIT's provisions, but may reflect the value of property at the time of an award.
Such argument, however, often overlooks the following qualifications in Chorzow itself that limit the general application of Chorzow's standard of damages in the context of investor-State dispute settlement:
(i) The scope of an obligation to pay 'full reparation' depends on the nature of legal rights involved;
(ii) The date of valuation adopted by the Court was a legal novelty designed to address specific obligations and rights under the Geneva Convention; and
(iii) The scope of the obligation of 'full reparation' depends on the character of international obligations and gravity of breach.
A. The Scope of an Obligation to Make Full Reparation Depends on the Nature of Legal Rights Involved
As stated above, the principle of full reparation was comprehensively formulated for the first time only in the Chorzow case. But from its inception, it was expressly limited to redress one State's rights breached by another State.
It bears emphasis that in Chorzow Germany did not bring diplomatic protection claims 'as representative of the individuals who have suffered injury,' ie, Oberschlesische and Bayerische.103 The 'object of the German application' was only 'to obtain reparation due for a wrong suffered by Germany in her capacity as a contracting Party to the Geneva Convention'.104 It was 'a question of the German Government's own rights'.105
Addressing the nature and scope of the obligation of full reparation, the Court stated:
The reparation due by one State to another does not however change its character by reason of the fact that it takes the form of an indemnity for the calculation of which the damage suffered by a private person is taken as a the measure. The rules of law governing the reparation are the rules of international law in force between the two States
102 Gray (n 64) 80.
103 Judgment 13 (n 61) 25-26. Those companies were entitled to different legal remedies before the Upper Silesian Arbitral Tribunal, which was one of the earliest examples of an institutionalized mechanism conferring a right of private action against a foreign State, and German-Polish Mixed Arbitral Tribunal [Judgment 13 (n 61) 27]. The damages suffered by Oberschlesische and Bayerische were used only as a reference point for determining reparation to Germany.
104 ibid 26.
105 ibid 25.
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concerned, and not the law governing relations between the State which has committed a wrongful act and the individual who has suffered the damage. Rights or interests of an individual the violation of which rights causes damages are always in a different plane to rights belonging to a State, which rights may also be infringed by the same act. The damage suffered by an individual is never therefore identical in kind with that which will be suffered by a State; it can only afford a convenient scale for the calculation of the reparation due.106
The Chorzow Court thus clearly distinguished between the rights and interests of an individual and those of a State. Because they are always in a different plane, the damage suffered by an individual is 'never identical in kind'' compared to the damage suffered by a State from the same wrongful act. It must follow from this substantive difference that the scope of reparation depends on whether an alleged breach concerns the injury to a sovereign State or the injury to an investor that invokes the international responsibility of a State on its own account.
This distinction is important. When a State invokes international responsibility of another State, even by way of diplomatic protection, it has 'a larger interest in maintaining the principles of international law than in recovering damages for one of its citizens'.107 This larger interest—to maintain the international legal order— derives from the nature of the inter-State system, which is based on the principle of sovereign equality of States. To re-establish the equilibrium premised on sovereign equality, it may therefore be required 'to wipe out all of the consequences of the illegal act', including by the payment of damages assessed at the time of indemnification.
By contrast, investor-State arbitration was designed to redress private commercial interests of investors, by allowing investors to bring investment claims on their own account without being dependent upon the discretion of their home State to exercise diplomatic protection.108 But this right of direct jurisdictional recourse cannot be automatically assumed to mean that an investor may claim full reparation in the same form and to the same extent as a State in an inter-State
1 09
context.
106 ibid 27-28 (emphasis added).
107 Spanish Zone of Morocco Claims (Great Britain v Spain) (1924) 2 UNRIAA 615; James L Brierly, The Theory of Implied State Complicity in International Claims (1928) 9 BYBIL 48 (emphasis added); Dickson Car Wheel Company (USA) v United Mexican States (July 1931) 4 UNRIAA 669, 679-80 ('When a state espouses the claim of its citizen, it is not merely prosecuting for its "economic loss", but for the loss of prestige and moral injury it has sustained and would sustain if it permitted its citizens to be injured without redress. Diplomatic protection is the sanction which insures a standard of treatment commensurate with international law.'); The Mavrommatis Palestine Concessions (Greece v United Kingdom), Judgment (30 August 1924) PCIJ Series A No 2 12 ('By taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights - its right to ensure, in the person of its subjects, respect for the rules of international law.') (emphasis added); Nottebohm Case (Liechtenstein v Guatemala) (Second Phase), Judgment (6 April 1955) ICJ [1955] 4 ('Diplomatic protection and protection by means of international judicial proceedings constitute measures for the defence of the rights of the State. As the Permanent Court of International Justice has said and has repeated, "by taking up the case of one of its subjects and by resorting to diplomatic protection or international judicial proceedings on his behalf, a State is in reality asserting its own rights—its right to ensure, in the person of its subject, respect for the rules of international law'".)
108 Case Concerning the Barcelona Traction, Light and Power Company, Limited {Belgium v Spain) (Second Phase), Judgment (5 February 1970) ICJ [1970] 44, paras 78-9. The ICJ explained that a State thus does not merely substitute itself for its national. It is 'its own right that the state is asserting.' As the 'sole judge' to decide whether and to what extent to exercise diplomatic protection, a State retains 'a discretionary power the exercise of which may be determined by considerations of a political or other nature, unrelated to the particular case' (emphasis added).
109 In Wintershall v Argentine Republic, the tribunal referred to Professor James Crawford to make the following observation:
Article 33(2) of the ILC's Articles, however, acknowledges the 'possibility' (as yet only a possibility - the ILC having taken no definite stand on this) of a 'secondary obligation' arising from a breach of a treaty accruing directly in favour of a person or entity other than a State - as to which Mr. James Crawford says:
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B. The Date of Valuation Adopted by the Court was a Novelty Designed to Address Specific Obligations and Rights under the Geneva Convention
Having articulated a general principle of full reparation,110 the Chorzow Court went further by saying that in the case of an expropriation prohibited by the Geneva Convention, the amount of compensation should be assessed as of the date of indemnification.111 It was a novel proposition; the majority of contemporaneous judicial and arbitral decisions calculated damages by reference to the date of a wrongful act.112
The Dissenting Opinions of Judges Finlay and Ehrlich in Chorzow criticized the Court's novel proposition as judicial activism unsupported by international law and contravening the principle of consent of the parties to the dispute. Specifically, Lord Finlay pointed out the Court's failure to recognize that no special provision had been made in the Convention as to 'what is to happen if the Government takes property in contravention of [the Convention's] provisions: that is left to the general law'.113 He then continued:
It is now however argued that it is not equitable that the general law should apply in such a case, and an effort is made to modify it so as to prevent the Government which has so acted being financially in no worse position than one which has acted under the provisions of the Geneva Convention.114
Lord Finlay criticized that it was 'entirely beyond the province of the Court in effect to introduce provisions of this nature, in the absence of agreement in treaty or convention to that effect'.115 According to him, the damages in that case should have to be assessed 'm the usual way", namely:
... at some level, a modern bilateral investment treaty disaggregates the legal interests that were dumped together under the Mavrommatis formula—though it is not accompanied by any detailed regulation in the Articles of the ways in which State Responsibility may be invoked by non-State entities (emphasis added).
The ILC's Articles on State Responsibility is a detailed and official study on the subject but it contains no rules and regulations of State Responsibility vis-á-vis non-State actors. Tribunals are left to determine 'the ways in which State Responsibility may be invoked by non-State entities' from the provisions of the text of the particular Treaty under consideration.
Wintershall Aktiengesellschaft v Argentine Republic, ICSID Case No ARB/04/14, Award (8 December 2008) paras 112-13 (emphasis added).
110 The Court stated: 'The essential principle contained in the actual notion of an illegal act—a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals—is that reparation must, so far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it—such are the principles which should serve to determine the amount of compensation due for an act contrary to international law'. Judgment 13 (n 61) 47.
111 The Court stated: 'The dispossession of an industrial undertaking—the expropriation of which is prohibited by the Geneva Convention—then involves the obligation to restore the undertaking and, if this be not possible, to pay its value at the time of the indemnification, which value is designed to take the place of restitution which has become impossible.' Judgment 13 (n 61) 48. As will be discussed above, the Court linked—and thus limited—this statement to the Geneva Convention in light of its object to guarantee the continuity of economic life in Upper Silesia. This limitation has been apparently ignored in the future invocations of the 'Chorzow principle.'
112 Gray (n 64) 81.
113 Dissenting Opinion by Lord Finlay (n 99) 72.
114 ibid.
115 ibid.
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[AJccording to the general principle of international law, these damages should be assessed upon the basis of the value of the undertaking at the time of the seizure ... together with a fair rate of interest on that value from that date until the date of payment; and in addition any other damage directly consequent upon the seizure.116
To the same effect was the dissenting opinion of Judge Ehrlich. He observed that 'any assessment of the damage resulting from the taking over of the enterprise must be based on the extent of the damage suffered at the time of dispossession.'117 He continued that it
is impossible to take as the date of assessment a date subsequent to dispossession, unless it were the fault of the Respondent that the claim could not be brought earlier before the international tribunal. ... Moreover the German Government itself has asked for a sum consisting of the capital amount and of interest calculated as from 1922.118
Even in such a case
no subjective consideration enters into account, such as a wrongful act entailing damages which should be calculated on some special basis; indeed the Court cannot presume that there has been anything but an error on the part of Poland in construing and applying the Geneva Convention.119
It is possible that Lord Finlay's and Judge Ehrlich's criticisms, while cogent and accurate, may have been slightly too harsh in the circumstances of the case, at least from an equitable point of view. The PCIJ's novel proposition to calculate damages at the date of indemnification could be understood by the Court's probable intention to penalize the wrongdoer, given the gravity of the breach and the prejudice it caused to interests protected by the Geneva Convention, which in their sensitivity and magnitude far exceeded interests commonly associated with investment protection treaties.
As explained above, the Court was seized with the dispute entailing complex security and economic interests that had to be protected following the controversial partition of Upper Silesia. In that combustible atmosphere, one of the objectives of the Geneva Convention on Upper Silesia, which was brokered by the League of Nations, was to ensure the continuity of the economic and social existence of Upper Silesia on the basis of status quo.120 Respecting the status quo was especially important, given that Poland had obtained the part of Upper Silesia that contained most of the region's mineral resources and much of its industry, whereas Germany had to be content with less, while still carrying the heavy burden of reparations. Poland's seizure of the nitrate factory at Chorzow—one of the largest operating nitrate factories in Europe at the time, of which Germany was also a creditor and lien-holder—could have undermined the economic status quo protected by the Geneva Convention, which in turn could have adversely affected Germany's capacity to pay reparations.
The Court explicitly stated that calculating damages at the time of indemnification 'particularly applies as regards the Geneva Convention, the object of which is to provide for the maintenance of economic life in Upper Silesia on the basis of
116 ibid 71.
117 Dissenting Opinion by M Ehrlich (n 99) 90.
118 ibid.
119 ibid (emphasis added).
120 Judgment 13 (n 61) 48.
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respect for the status quo'.121 This unique objective—not found in investment protection treaties—appears to explain why the PCIJ was prepared to determine the value of property not as it was at the time of the dispossession, but at the time of the indemnification. To do otherwise in those circumstances would not have been consistent with protecting the established economic status quo, because Poland might have reaped the benefit of an increase in the value of the seized property, thus unsettling the balance singularly in its favor and also impairing the capacity of Germany to pay reparations imposed after the WWI.
It follows that because the interests protected by the Geneva Convention were of a different order of magnitude than the interests underlying investment protection treaties, the heightened standard of compensation adopted in Chorzow, may not be lightly transposed into the context of investment arbitration.
C. The Scope of the Obligation of Full Reparation Depends on the Character of International Obligations and Gravity of Breach
In Chorzow Factory, the Court also made clear that the scope of the obligation to pay full reparation, including its element of heightened damages, may depend on the character of an international obligation and the gravity of a breach.
Contrary to a common misconception, the Court in Chorzow Factory was not dealing with a paradigm case of 'unlawful' expropriation under customary international law or an investment protection treaty. The case involved the seizure of property that 'could not be taken even against compensation.' Making things even worse, the seizure was also conducted in the face of an express prohibition established by a treaty concerned with the matters of international peace and stability in the aftermath of the partition of the contested territory. The Court emphasized that the action of Poland was
not an expropriation—to render which lawful only the payment of fair compensation would have been wanting; it [was] a seizure of property, rights and interests which could not be expropriated even against compensation, save under the exceptional conditions fixed by Article 7 of the said Convention,122
ie only after the determination by the Upper Silesian Mixed Commission that expropriation was indispensible to ensure the continuation of the exploitation of a business undertaking. The Court thus distinguished between two different wrongful acts: expropriation without compensation where a State has the right to expropriate, as in the case of modern investment protection treaties, and a seizure of property that cannot be expropriated even against compensation. While failure to pay compensation may still be a wrongful act, it is not inherently unlawful compared to illegality of a higher magnitude.
It is based on the distinction between different levels of illegality, that the Court also distinguished between different levels of damages:
It follows that the compensation due to the German Government is not necessarily limited to the value of the undertaking at the moment of dispossession, plus interest to the day of payment. This limitation would only be admissible if the Polish Government had had the right to expropriate, and if the wrongful act consisted merely in not having paid to the two
121 ibid.
122 ibid 46 (emphasis added).
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Companies the just price of what was expropriated; in the present case, such a limitation might result in placing Germany and the interests protected by the Geneva Convention, on behalf of which interests the German Government is acting, in a situation more unfavourable than that in which Germany and these interests would have been if Poland had respected the said Convention. Such a consequence would not only be unjust, but also and above all incompatible with the aim of Article 6 and following articles of the Convention—that is to say, the prohibition, in principle, of the liquidation of the property, rights and interests of German nationals and of companies controlled by German nationals in Upper Silesia—since it would be tantamount to rendering lawful liquidation and unlawful dispossession indistinguishable in so far as their financial results are concerned.123
It clearly follows from this statement that if a wrongful act consists merely in not having paid compensation for what is expropriated, a State's liability is limited to the value of property at the moment of dispossession. Failure to pay appropriate compensation renders expropriation 'unlawful, if at all, only sub modo,' as opposed to expropriation unlawful per se,124 and therefore does not trigger the application of full reparation with its element of heightened damages that the Court wished to apply in the circumstances of Chorzow.125 The same would appear to apply to similarly delictual conduct.
Something more is required to make the so-called Chorzow 'standard' applicable in investment arbitration, something more akin to the egregious breach of sensitive international obligations as evidenced in Chorzow Factory. Other examples, as Professor Brownlie observed in distinguishing between expropriation unlawful sub modo and unlawful per se, may include seizures which are part of crimes against humanity or genocide, measures of unlawful retaliation or reprisal against another State, or aimed at persons of particular groups or nationals of particular states.126
123 ibid 47 (emphasis added).
124 Ian Brownlie, Principles of Public International Law (OUP 2003) 514-15. The practical distinctions between expropriation unlawful sub modo, ie if provision is not made for compensation, and expropriation unlawful per se would seem to be these: the former involves a duty to pay compensation only for direct losses, ie the value of the property, the latter involves liability for consequential loss {lucrum cessans). In the Amoco case, the Iran-US Claims Tribunal made also clear that 'the compensation to be paid in case of a lawful expropriation (or of a taking which lacks only the payment of a fair compensation to be lawful) is limited to the value of the undertaking at the moment of dispossession.' To emphasize this point, that tribunal added that, if the State's 'wrongful act consisted merely in not having paid ... the just price of what was expropriated' the State's liability is 'limited to the value of the undertaking at the moment of dispossession.' Amoco International Finance Corporation v The Government of the Islamic Republic of Iran, National Iranian Oil Company, National Petrochemical Company and Kharg Chemical Company Limited, Case No 56, Award No 310-56-3 (14 July 1987), reprinted in 15 Iran-US CTR para 196 (emphasis added). Similarly, the European Court of Human Rights clearly distinguishes between inherent illegality of a taking, and illegality due to the mere lack of compensation. Case of Scordino v Italy (No 1), ECHR Application No 36813/97, Judgment (29 March 2006) paras 251-3; The Former King of Greece & Others v Greece, ECHR Application No 25701/94, Judgment (28 November 2002) para 78: 'As the lack of compensation, rather than the inherent illegality of the taking, was the basis of the violation found, the compensation need not necessarily reflect the full value of the properties' (emphasis added).
125 Note that some tribunals erred by deciding that failure to pay compensation for expropriation triggers the obligation to pay full reparation, as for example in: Bernardus Henricus Funnekotter and others v Republic of Zimbabwe, ICSID Case No ARB/05/6, Award (22 April 2009) paras 106-7 ('As a consequence, the Tribunal concludes that Zimbabwe breached its obligation under Article 6(c) of the BIT to pay just compensation to the Claimants. Accordingly, as stated in paragraph 98 above, the Tribunal does not need to consider whether other provisions of the BIT have been violated.'); Marion Unglaube and Reinhard Unglaube v Republic of Costa Rica, ICSID Case Nos ARB/08/ 1 and ARB/09/20, Award (16 May 2012) para 305 ('In the present case, the conduct of the State did not conform to the terms of Article 4(2). Specifically, the violation of the Treaty that rendered Respondent's action internationally unlawful (both under the Treaty and under customary international law), was that adequate compensation, meeting the standards of Article 4(2), was not, in fact, paid to Mrs. Unglaube within a reasonable period of time after the State declared its intention to expropriate.'); Compania de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/3, Award (20 August 2007) para 7.5.21 ('If we conclude that the challenged measures are expropriatory, there will be violation of Article 5(2) ofthe Treaty, even of the measures might be for a public purpose and nondiscriminatory, because no compensation has been paid.'); ConocoPhillips Petrozuata BVand others v Bolivarian Republic of Venezuela, ICSID Case No ARB/07/30, Decision on Jurisdiction and the Merits (3 September 2013) paras 337-42.
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The gravity of a breach is also a factor recognized by Articles on Responsibility of States for Internationally Wrongful Acts. Article 33(1) reads:
The obligations of the responsible State set out in this Part may be owed to another State, to several States, or to the international community as a whole, depending in particular on the character and content of the international obligation and on the circumstances of the breach.
Commentary (1) to Article 33(1) elaborates that '[e]vidently the gravity of the breach may also affect the scope of the obligations of cessation and reparation.''127
The conclusions to be drawn from a consideration of the Chorzow case therefore appear to be that the scope of damages can vary not only depending on whether injury is done to a private entity or a State but also on the level of illegality of a wrongful act. These factors were overlooked in those awards which erroneously decided that Chorzow can apply to quantify damages of foreign investors.128 This flawed approach is illustrated in ADC v Hungary, where the tribunal concluded that 'it must assess the compensation to be paid [for wrongful expropriation] in accordance with the Chorzow Factory standard, ie the Claimants should be compensated the market value of the expropriated investments as at the date of this Award? not at the date of expropriation, to take account of the fact that 'the value of the investment after the date of expropriation rose very considerably'.129 This decision ignored in the first place the distinction that Chorzow Factory expressly drew between damages payable to a State and to an individual.130 As Professor Crawford observed, pointing to investment tribunals' misplaced reliance on Chorzow Factory to determine damages:
the Permanent Court in Chorzow Factory itself distinguished between the principles of quantification of damages applicable in inter-state matters and those applicable in cases between States and private parties; of course Chorzow fell in the first category not the second. So it is not particularly helpful.131
It is also questionable whether ADC v. Hungary was correct in calculating the value of damages as at the date of the award, given that Chorzow Factory made clear that where a State has a right to expropriate but fails to comply with one of the requirements of expropriation, the compensation due is limited to the value of property at the moment of expropriation.132
Brownlie (n 124) 514-15. See also Case Concerning Pulp Mills on the River Uruguay (Argentina v Uruguay), Judgment (20 April 2010) ICJ Rep 2010 para 274 (The ICJ said that the forms of reparation 'must be appropriate to the injury suffered, taking into account the nature of the wrongful act.')
127 James Crawford, The International Law Commission's Articles on State Responsibility: Introduction, Text and Commentaries (CUP 2002) 228, comment 27.
128 See n 124 supra.
129 ADC v Hungary, ICSID Case No ARB/03/16, Award (2 October 2006) paras 499, 496.
130 Section IV (A) infra.
131 James Crawford, 'Similarity of Issues in Disputes Arising under the Same or Similarly Drafted Investment Treaties' in Emmanuel Gaillard and Yas Banifatemi (eds), Precedent in International Arbitration (IAI 2008), 99-100.
132 Section IV (C) infra. See also Jeswald W Salacuse, The Law of Investment Treaties (OUP 2010) 328 ('By not making provision for the payment of market value Hungary undoubtedly violated its treaty obligation, but according to the treaty the proper remedy is the payment of compensation equal to the market value of the investment. Moreover, a strict application of the tribunal's reasoning would lead to the curious result that in cases in which an expropriation meets all the conditions for a legal expropriation except for a determination by the tribunal that the host state had not paid market value for the property expropriated such an expropriation would have to be considered "illegal" and compensation would therefore be awarded not on the basis of the valuation standard in the treaty but on the basis of the Chorzow Factory principle and customary international law. It is suggested that such a result would not accord with the intention of the contracting parties as evidenced by the treaty text.').
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V. CONCLUSIONS
The legal and public policy considerations underlying Chorzow's intention to award full reparation based on the value of the property at the time of indemnification militate against the mechanical application of this approach in investment arbitration. Although investors have been given recourse to investment arbitration, this has not entitled them to the whole remedial arsenal available to and developed for States. Chorzow makes this clear. Because the rights of investors, which pursue narrow individual commercial interests, lie in a different plane than the rights of States, which pursue broader interests of maintaining international legal order, the damage investors may suffer is thus not similar to the damage States may suffer in order to warrant full reparation with its element of heighted damages.
Chorzow also makes clear that illegality justifying the award of heightened damages must stem from a different circumstance than, for example, a mere failure to pay compensation.
Finally, Chorzow brings to a high relief the distinction between the public policy at stake in that case and the one pursued in investment agreements. In Chorzow, the novel remedy was conceived to disallow a wrongdoer from reaping the benefit of an increased value of property; it was necessary to protect the established economic status quo underlying a peace settlement following a global war. By contrast, the policy underlying many BITs, as rightly underscored by some investment tribunals,133 is concerned with striking a balance between investors' economic interests and the sovereign right of a host State to regulate for the benefit of its society. Disputes arising under BITs generally involve complaints about a State's actions that affect a private entity's commercial activities in that country. While there are circumstances where a State's treatment of a foreign investor may be reprehensible, it is rare that they threaten the peace and security of the international system.
133 Saluka Investments BV (The Netherlands) v The Czech Republic, UNCITRAL, Partial Award (17 March 2006).