International Legal Responsibility of States over MNEs

By Atty. Dennis G. Manicad

I. Concept of State Responsibility
International liability by a state in international law refers to that arising from the breach of any obligation owed under international law (Coquia & Santiago 2005). One of these liabilities is the responsibility for harm or injury to alien or foreign business.

A state causing injury to a foreign national may become responsible to the national’s state (but not to the national) for the harm done based on the general responsibility by one state to another for injuries that it may cause (August 2004).

As United States Secretary of State Elihu Root said in 1909:

“Each country is bound to give the nationals of another in its territory the benefit of the same laws, the same administration, the same protection, the same redress for injury which it gives to its own citizens, and neither more or less; provided the protection which the country gives to its own citizens conforms to the established standards of civilization.” (Emphasis supplied.)

“There is a standard of justice, very simple, very fundamental and of such general acceptance by all civilized countries as to form part of the international law of the world. The condition upon which any country is entitled to measure the justice done from it to an alien by the justice it accords to its own citizens is that its system of law and administration does not conform to that standard, although the people of the country may be content or compelled to live under it, no other country can be compelled to accept it as furnishing a satisfactory measure of treatment to its citizens.”

Diplomatic Protection
As a consequence of this doctrine of state responsibility, the home state of a national can extend “diplomatic protection” to its national who may be in another state (host state).

Individuals or Natural Persons
Because of the traditional concept in international law that individuals are considered as “objects” and not subjects of international law, there have arisen doctrines regarding the protection and responsibility of states for injuries inflicted on individuals (Bernas 2002). Today, the European Court of Human Rights as well as the Optional Protocol to the International Covenant on Civil and Political Rights allows access to European Court by individuals (Coquia & Santiago 2005). However, since international law is still dominated by states and supranational bodies, state protection for individuals has not yet become obsolete.

Corporations
A corporation being a juridical being, some of the rules in international law pertaining to individuals may apply to corporations, thus:

“Many rules that affect an individual in a literal manner, such as those for exclusion or deportation, relevant to corporations in a metaphorical sense. They “enter” countries only in the sense that persons within the country, whether national or aliens act for them in their names.” (Deltev Vags 1998)

Some rules however cannot, thus:

“Other questions are however critical and applicable only to natural persons: capacity to sue, protection against arbitrary deprivation of rights, the right to own property or to engage in economic activity within its territory.”

One transnational problem of a corporation is with regard to the right to sue. The court in the case of Bank of Augusta v. Earle (38 U.S. (13 Pet.) 519, 634, 4 L. Ed. 629, 659 (1819)) stated: “as a corporation is a mere creature of law and of the state, it can have no existence beyond the limits in which it operates.” In practice however the right to sue is allowed in many jurisdictions like the United States and the Philippines, without the need for registration for “isolated transactions.”

Multinational Corporations or Enterprises (MNEs)
MNEs play a key role in the global economy. Consider this:
· The world’s 1,000 largest industrial firms, most of which are MNEs, account for roughly eighty percent of the global industrial output.
· In a Conference Board survey of 1,250 publicly listed large firms, MNEs represented only thirteen percent of the sample by had fifty-three percent of total sales.
· Roughly forty to fifty percent of world trade is conducted between MNEs and their affiliates. One-third of trade in the United States consists of transfers between units of the same MNE. Interestingly, while the United States as a whole has a large trade deficit, MNEs in the United States export more to their foreign affiliates that they import from them.
· The annual sale of each of the ten larges industrial MNEs exceed the tax revenues of Australia. In Ireland, foreign firms accounted for two-thirds of national output and almost fifty percent of employment (Shenkar & Lou 2005).

An MNE may generally be characterized as follows:
· First, it is a creature of national and not international law. Although there are proposals for internationalizing the MNE, there is no basis yet in the existing law for such.
· Second, the MNE is a creature of private corporation law – that is, it is a privately (shareholder) owned company organized for profit. Thus, a simple analogy cannot be drawn between the MNE and a “government” or a “political system.” Economic rather than broad political goals spur MNEs. However its economic goals will give an MNE interest in the political and economic policies and strategies of its home and host states.
· Third, an MNE is not a single entity, but rather a structure made up of many corporations each incorporated under the laws of their respective countries and tied together by stock ownership or other contractual arrangements. Less formally but more significantly, the units tend to respond to a common strategy directed from one center (Vagts 1998).

State Responsibility over MNEs
MNEs enjoy certain rights and privileges in host states, which may be enforced by its home states (thru diplomatic protection). In the case of Barcelona Traction, Light and Power company, Ltd. (Belgium v. Spain) (1970 I.C.J. p. 3), the court ruled that: “When a state admits to its territory foreign investment or foreign nationals, whether natural or juridical persons, it is bound to extent to them the protection of the law and assumes obligations concerning the treatment to be afforded to them…”

A state is entitled to represent and afford diplomatic protection to corporations having its nationality. However, a host state may reject representation by the state of incorporation where the latter was chosen solely for legal convenience, for example, as a tax haven, and the corporation has no substantial link with that state, such as property, an office, or a commercial or industrial establishment, substantial business activity, or residence of controlling stockholders (Restatement of the Law 3rd, Foreign Relations Law of the United States). Thus, the corporate veil may be pierced in determining nationality (Coquia & Santiago 2005), thus:

“In case of corporations, it is even more complex. The basic test is where the entity was incorporated and had its registered office, but there are some tests that “pierce the corporate veil.” The tests include determining the majority of the shareholders, determining the nationality of the board of directors, the state in which the corporation is physically located, and the state in which the corporation conducts its business.” (Coquia & Santaigo 2005)

State Responsibility for International Wrongful Acts
Source
The International Law Commission (2002) passed on second reading the draft article on State Responsibility for Internationally Wrongful Acts. While not yet final, the principles are widely accepted (Bernas 2002), thus:

· Every internationally wrongful act of a State entails international responsibility of that state (Article 1).
· There is an internationally wrongful act of a State when conduct consisting of an act or omission:
(1) Is attributable to the State under international law; and
(2) Constitutes a breach of an international obligation of the State (Article 2).
· The characterization of an act of a State as an internationally wrongful act is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law (Article 3).
· There is breach of an international obligation when an act of that State is not in conformity with what is required of it by that obligation, regardless or origin or character (Article 12).

Doctrine of Imputability
A state is only responsible for actions that are imputable or attributable to it or acts by its officials within their apparent authority, including acts within the scope of an official’s authority as well as acts outside the scope of his authority if the state provided the means or facilities to accomplish the same (August 2004).

Acts of State Organs and its Agents
The conduct of any State organ acting in that capacity shall be considered as an act of the State under international law, whether the organ exercises legislative, judicial or other functions, whatever position it holds in the organization of the State, and whatever its character as an organ of the central government or of a territorial unit of that State (Article 4, paragraph 1, Draft Article on Responsibility of States for Internationally Wrongful Acts 2001).

An organ includes any person or body that has that status in accordance with the internal law of the State (Article 4, paragraph 2). The conduct of an entity which is not an organ of the State but which is empowered by the law of that State to exercise elements of the governmental authority shall be considered as an act of that State under international law provided that the entity was acting in that capacity in the case in question (Article 5).

Fault or Causation is Immaterial
Because of the difficulty of proving lack of proper care by a state, courts instead look for causation. In the lighthouse arbitration case between France and Greece, the question arose there was a cause and effect relation between Greece’s eviction of a French firm from its offices in Salonoka and the loss of merchandise by fire at the firm’s new temporary location. The Permanent Court of Arbitration held that there was no causal relation between the transfer and the occurring fire.

The court in the Union Bridge Company Claim (1924) held that a state is responsible for mistaken actions. The facts of the case state that after the outbreak of the war between the Orange Free State and Great Britain in 1899, a British colonial government railway storekeeper was told to confiscate all bridge material destined for the Orange Free Country State. By mistake, he confiscated material belonging to a neutral alien that was intended for road construction. The arbitrators held that Great Britain liable. The judgment stated that liability will not be affected either by the fact that the storekeeper did so under mistake as to the character and ownership of the material or that it was a time of pressure and confusion as caused by the war, or by the fact, which on evidence must be admitted that there was no intention on the part of the British authority to appropriate the material in question. (United Nations Report on Arbitral Awards)

A state is responsible for ultra vires acts by its officials under the cover of their official character resulting in breach of a contractual obligation. The facts in the case of Sandline International, Inc. v. Papua New Guinea (PNG) (International Law Report, vol. 117, p. 552 (2000)) show that PNG entered into a contract with Sandline, a company incorporated in the Commonwealth of the Bahamas and carrying on business in the United Kingdom for the provision by Sandlin of military and security services of an operational and support nature particularly in relation to an internal conflict in ONG. The parties engaged in the performance of their agreement until March 16, 1997 when insurrection and mutiny by the members of the PNG defense force took place. Sandline personnel were arrested, civilians joined the uprising and seized the parliament, while the Prime Minister suspended and called for a judicial inquiry of the agreement with Sandline. The arbitration court ruled in the case that PNG could not rely on its internal law as basis for its plea that the contract is illegal. It is an established principle in international law that acts of the state will be binding on the state even if they are ultra vires or unlawful under the internal law of the state. Pacta sunt servanda (pacts must be respected).

Likewise, in the Caire Claim (France v. Mexico) (1929 RIAA v. 516), the French Mexican Claims Commission ruled that Mexico is liable for the killing of Caire, a French national, by Mexican soldiers after demanding money from him, under the doctrine of “objective responsibility” of states, that is, states’ responsibility for acts of its officials or organs which may devolve upon it even in the absence of fault of its own. In order to be able to admit this so-called responsibility, the officials or organs must have at least all appearance as such or they must have used powers or methods to appropriate official capacity.

Acts of Quasi-State Organs
The conduct of a person or groups of persons shall be considered as an act of the State under international law if the person or group of persons was in fact exercising elements of the governmental authority in the absence or default of the official authorities and in circumstances such as to call for the exercise of those elements of authority (Article 7, Draft Articles on Responsibility of States for Internationally Wrongful Acts 2001).

The conduct of an organ placed at the disposal of a State by another shall be considered an act of the former State under international law if the organ was acting in the exercise of elements of the governmental authority of the State at whose disposal it had been placed (Article 8, Draft Articles on Responsibility of States for Internationally Wrongful Acts 2001).

In the case of the United States v. Iran (1980 ICJ Rep.) pertaining to the Iran Hostage Crisis in 1979 consisting of armed attack against the United States’ embassy in Iran by Muslim students, the court pointed out that the conduct of the militants could be directly attributed to the Iranian state only if it can be established that they were in fact actions taken on its behalf since the information submitted to the court did not establish the same with certainty. However, the Iranian state was considered to be at least under obligation to take appropriate steps to protect the United States’ embassy.

Nonimputable Acts
States are responsible for actions taken by their officials, but not for acts of private persons, officials of other states, international organizations or insurrectionaries (Agust 2004)

Conduct of an insurrectional or other movement that becomes the new government of a State shall be considered as act of that State under international law. The conduct of a movement, insurrectional or otherwise, which succeeds in establishing a new State in part of the territory of a pre-existing State or in a territory under its administrations shall likewise be considered as an act of the new State under international law. The foregoing is without prejudice to the attribution to a State of any conduct, however related to that of the movement concerned, which is to be considered as an act of that State. (Article 10, Draft Articles of Responsibility of States for Internationally Wrongful Acts 2001)

In the case of the Home Missionary Society Claim (United States v. Great Britain) (1920 RIAA vi. 42), Great Britain was not held liable for the serious and widespread revolt that resulted to attacks on United States’ missions as a result of the imposition of the “hut tax”. The court held that it is an established principle in international law that no government can be held responsible for the act of rebellious bodies of men committed in violation of its authority where it is not guilty of breach of good faith.

The facts in the case of Short v. Iran (United States v. Iran 1987) shows that Short employed by Lockheed, an American company in Iran, sought compensation for salary and other losses arising from his being evacuated on February 8, 1979 before the Islamic Revolutionary Government took office. The Iran-US Claims Tribunal observed that if the revolutionary government succeeds and takes over the reigns of government, the state would be liable for the acts of the revolutionaries even prior to their assumption of power. However, the claimant failed to prove that his departure from Iran can be imputed to Iran’s wrongful conduct.

II. International Standard of Care
There are now two criteria in case law: the national standard and the international standard (or the international minimum standard) (August 2004). Roman law has progressed from jus civile, that is, state protection applies only to citizens, to jus gentium, meaning that state protection applies to both citizens and aliens (Bernas 2002). National treatment would be adequate if the host country treats its citizens well. Otherwise, it would be well to qualify jus gentium with the proviso that Elihu Root enunciated – “provided the protection which the country gives to its own citizens conforms to the established standards of civilization.”

The international standard states that although a state has no obligation to admit aliens, once it does so, the states are bound to treat the aliens in a civilized manner. In the Neer Claim (United Nations Report of Arbitral Awards 1920) concerning the killing of Mr. Neer by armed men, the arbitral court ruled that mistreatment of an alien constitutes a violation of international standard if it “should amount to an outrage, to bad faith, to willful neglect of duty or to an insufficiency of governmental action so far short of international standards that every reasonable or impartial man would readily recognize its insufficiency.” (August 2004)

Sources and references:

August, R. (2004), International Business Law.

Bernas (2002). An Introduction to Public International Law.

Coquia & Santiago (2005), International Law and World Order.

Detlev Vags (1998). Transnational Business Problem.

Draft Articles on Responsibility of States for Internationally Wrongful Acts (2001).

Restatements of the Law 3rd, Foreign Relations Law of the United States.

Shenkar & Lou (2005). International Business.