(Diplomatic Protection)

New York, 29 October 2003

Mr. Chairman,

Today I would like to comment on the topic of diplomatic protection. I wish to thank the Special Rapporteur for his excellent work and congratulate on the progress made by the Commission with this topic.

Regarding this topic, the Commission has adopted the approach of codifying customary law. This is reflected in the provisionally adopted draft articles on the definition and scope of diplomatic protection, the protection of natural persons, the exhaustion of local remedies, and the proposed articles on the diplomatic protection of corporate persons. We believe that such a methodology is appropriate for this traditional area of international law rich both in practice and literature.

I now wish to make the following comments on the exhaustion of local remedies rule and the diplomatic protection of corporate persons.

First, regarding the exhaustion of local remedies, the Commission has provisionally adopted at its current session three draft articles respectively governing the implication of the exhaustion of local remedies rule (Article 8 (1)); the definition of local remedies (Article 8 (2)); category of claims (Article 9); and exceptions to the local remedies rule (Article 10). We support in principle these draft articles.

Regarding the four exceptions to local remedies provided for in Article 10, we are of the view that the following points should be made clear:

a. There must first be an assumption that the judicial system of any state is capable of providing reasonable legal remedies, and there should be no subjective prejudgment negating the fairness and effectiveness of the injuring state's legal remedies. Determination of reasonable possibility of effective redress should be primarily based on whether the actual application of local remedies gives rise to clear and serious violations of the local law, and the burden of proof lies with the state intent on applying diplomatic protection;

b. The absence of voluntary connection between the injured person and the state where the injury occurred can be an exception, while it should be noted that should relevant circumstances rule out application of the principle of diplomatic protection pursuant to the relevant specific international law then there exists no justification for the voluntary connection exception. For example, when an act of a state constitutes a direct injury upon another state's international rights, or when transboundary harm arises out of acts not prohibited by international law, the injured state may, pursuant to the relevant international law, seek to directly resolve the matter with the responsible state by way of peaceful settlement of international dispute rather than the application of the principle of diplomatic protection and the rule of the exhaustion of local remedies;

c. Part of the language in Article 10 (c), i.e., “ … the circumstances of the case otherwise make the exhaustion of local remedies unreasonable … ”, while offering the court presiding over the dispute the benefit of discretionary ruling, entails nevertheless the possibility of arbitrary expansion of the application of exceptions. The peaceful settlement of dispute between states is not merely a judicial avenue. Arbitrary claiming of exceptions by states in the bilateral settlement of dispute will be harmful to the effective application of the rule of local remedies. In addition, since the criterion on the provision of reasonable possibility of effective redress is already rather loose, we should allow no further expansion of this exception by the injection of uncertainties. Therefore we propose to delete this language;

d. Responsible state's waiver of the requirement that local remedies be exhausted can be an exception. However, such waiver had better be made through an explicit act.

Second, on the subject of diplomatic protection of corporations as legal persons, we must lay equal emphasis on considering the interests of the corporation and its shareholders and on accommodating the interests of the host State. We favour taking the principle established in the judgment in the Barcelona Traction case as the primary basis for the exercise of diplomatic protection in respect of corporate legal persons. The right to exercise diplomatic protection should solely belong to the State of nationality of the corporation; the State of nationality of the shareholders, as a general rule, has no right to confer diplomatic protection on shareholders. As to how the State of nationality of a corporation is to be determined, one should take into account international practice and the approach widely adopted by national States. The draft article 17 prepared by the Special Rapporteur is basically acceptable. As national laws generally set forth conditions for incorporation within their territories, the fact that a corporation is incorporated in a State under its laws is, in effect, sufficient to meet the requirement for a genuine link between the corporation and the State in question. If an investor chooses to set up, out of some economic consideration, a corporation in a State without stringent requirements for incorporation, the associated risks of potentially losing diplomatic protection which may result from the lack of a genuine link between the corporation and its State of nationality can only be borne by himself/herself. For this reason, the notion of treating the State of incorporation and the place of registered office as the State of nationality of a corporation is a feasible one; there is no need to adopt other criteria such as a“genuine link” or “appropriate link”.

As to the right of the State of nationality of the shareholders to exercise diplomatic protection on their behalf as exceptions, the Special Rapporteur has worked out three scenarios, i.e.,

· when the corporation has ceased to exist in the place of its incorporation [Article 18 (a)],

· when the State of nationality of the corporation is responsible for causing injury to the corporation [Article 18 (b)] and

· when the direct rights of the shareholders have been infringed upon (Article 19).

In this connection, our views may be summed up as follows:

Article 18 (a), the situation where the corporation has ceased to exist in the place of its incorporation

1. It should be pointed out that the phrase “has ceased to exist” in this context refers to cessation of the status of the corporation as a legal person rather than its de facto paralysis, financial crisis, cessation of business operations or even liquidation. Only changes in its legal status should receive consideration as is outlined in the ICJ judgment in the Barcelona Traction case.

2. This exception should be aligned with the principle of continuous nationality as contained in Article 20. Article 18 (a) and Article 20, as currently drafted by the Special Rapporteur, are likely to give rise to a situation in which the State of nationality of a corporation and the State of nationality of shareholders of the corporation are both entitled to the exercise of diplomatic protection. Although the Special Rapporteur has considered this possibility, he does not believe it to be problematic. We beg to differ, for this would mean that the State of nationality of the shareholders may accord diplomatic protection to its shareholders while the State of nationality of the corporation may do likewise in respect of the corporation; the host State would have to face two different disputes resulting from one and the same injury. This would undoubtedly complicate dispute resolution and add to the burden of the host State. The Commission should try and avoid situations in which multiple States claim the right of diplomatic protection vis-à-vis the same injury, and should reconsider this problem.

3. In Article 18 (a), “the place of its incorporation” may be better replaced by “the state of its incorporation” so as to avoid disagreement.

Article 18 (b) cannot be construed to mean that the procedure of diplomatic protection by the State of nationality of foreign shareholders will be automatically triggered when the State of nationality of their corporation has infringed upon the rights of the corporation. Only after the corporation’s attempt to assert its rights through redress from its State of nationality has failed due to serious violations of the law by its State of nationality can the procedure of diplomatic protection by the State of nationality of foreign shareholders be started on their behalf. Under such circumstances, the foreign shareholders should first exhaust local remedies and only when they are denied judicial treatment will their State of nationality be allowed to intervene in respect of diplomatic protection.

On the exception in Article 19, the protection of shareholders by their State of nationality in the event of infringement of their direct rights is in effect the exercise of diplomatic protection in respect of natural persons. Under the rules on the protection of natural persons, there is no problem with diplomatic protection in such cases.

On Article 21, which deals with lex specialis, we believe that the provisions should be expanded to be applicable to all the draft articles on diplomatic protection in respect of corporate legal persons and natural persons alike. There are a host of lex specialis regimes that bear relevance to diplomatic protection. At present, bilateral investment protection agreements alone number more than 2,000 in the world and they play an important role in practice. As a general rule, it is imperative to clearly accord priority to such lex specialis as bilateral investment protection agreements for application purposes.

On the protection of other legal persons as set forth in Article 22, we are of the view that if the provisions on the exercise of diplomatic protection in respect of the corporation were to be applied mutatis mutandis to other legal persons, it would give rise to serious problems. In real life, the specific circumstances of other legal persons vary a great deal as schools, churches, non-governmental organizations, foundations and even partnerships may all be admitted. These entities are not only different from one another, they are distinctly at variance with corporations as well. Besides, their connections with the State of protection cannot be easily determined in a uniform manner. It is therefore very difficult to simply apply the rules of corporate diplomatic protection mutatis mutandis to those entities. In practice, even though these non-corporate entities are also engaged in extensive international exchanges, national States rarely confer diplomatic protection on them. In this area, there is hardly any mature case law for us to draw upon. Insistence on its application mutatis mutandis may, instead of contributing to dispute settlement, further add to its difficulty and produce tremendous political uncertainty. Thus, we propose the deletion of this article.

That concludes my intervention on this topic.

Thank you, Mr. Chairman.