Causation in International Investment Law

Causation refers to the issue of proving a causal link between the State’s conduct and the investor's injury.¹

Causation can arise in one of two ways in international investment law. First, if proving a causal link between the State’s conduct and the investor’s injury is necessary for a State’s international responsibility, it will arise in the merits phase. (See Section IV. A. below). Second, if not classified as such, this issue will invariably arise in the quantum phase because (a) compensation is the default remedy in investor-State arbitration;² and (b) an order for compensation requires proof of causation between the State’s conduct and the investment losses.³ (See Section IV. B. below).

Investment treaties do not define the meaning of causation. To fill the void, arbitral tribunals have had recourse to the commentaries for Articles on Responsibility of States for Internationally Wrongful Acts (the "ILC Draft Articles").⁴

The ILC Draft Articles specifies that a State’s conduct becomes causal if it, (a) actually causes the consequence in question; and (b) is a factual cause with legal significance.⁵

Very deliberately,⁶ the ILC offered no further commentary on causation and noted that its exact meaning would vary depending on the primary rule under consideration.⁷ Following this theory, causal link has a special meaning in respect of the investment protection standards of international investment law. Arbitral awards coming from investor-State arbitrations are the principal resources for ascertaining that meaning.

By frequently using the but-for test,⁸ arbitral tribunals have implicitly indicated that the State's conduct counts as a factual cause if it was necessary for the occurrence of the consequence, as opposed to being ‘sufficient’ for the occurrence of the consequence.⁹ In the cases where two or more antecedents - one of which is the State's conduct - could produce the consequence, but only one of them actually operates as the factual cause (casual overdetermination), the case law on this point indicates that the State's conduct will not be causal, even if it is the actual cause.¹⁰

In cases where there are two or more contributing causes, the Commentary to Article 31 of the ILC Draft Articles, often cited by case law, provides that the existence of one contributing cause does not exclude the causality of the other (and vice versa), unless the State’s action is considered too remote).¹¹ See also Investor's conduct.

Arbitral tribunals have generally embraced the idea that the State’s conduct, taken as a whole, must actually cause injury. Some arbitral tribunals, however, have tested whether the unlawful aspect of the State's conduct was the causal link.¹² For example, in the context of claims based on the fair and equitable treatment standard, arbitral tribunals have considered whether the unfair and inequitable aspect of the state’s conduct was the cause of the investor's injury.¹³ In another case before the Iran-US Claims Tribunal, the testing for the causality of the unlawful aspect of the relevant is endorsed as the proper test for factual causation, although this was not an investor-State dispute.¹⁴

As regards the standard of proof for the causal issue, arbitral tribunals have endorsed the standard of ‘in all probability’.¹⁵ This is seemingly a higher standard than ‘on the balance of probabilities’.¹⁶ Other arbitral tribunals have opted for the usual standard, on the balance of probabilities.¹⁷

If the State’s conduct is a factual cause, then the next question is whether it is also a legal cause.¹⁸ Assuming that there are other factual causes for the injury, legal causation aims to determine whether the State’s conduct should be recognised as a cause for legal purposes.¹⁹ Because this is a normative determination,²⁰ a variety of normative notions are used to identify legal causes.

Notions mentioned in the ILC Draft Articles,²¹ namely foreseeability,²² directness,²³ and remoteness,²⁴ have found their way into arbitral awards. Another notion coming out of arbitral awards is ‘operative cause’.²⁵ There is no doctrine on when one notion should be applied in preference to the others.²⁶

Moreover, there is limited jurisprudence on what meanings arbitral tribunals attach to them when they do apply them. As regards to foreseeability, it appears that it carries its ordinary meaning;²⁷ in other words, it is satisfied if, according to ordinary human knowledge, the consequence was a foreseeable one at the time of the State's conduct.²⁸ Tribunals have held that operative cause is the factual cause with ‘far greater weight’,²⁹ which indicates that it refers to the most causally potent factual cause. Direct cause seemingly refers to the factual cause that immediately preceded the consequence.³⁰ The idea of proximate cause also appears in arbitral awards. Rather than being a distinct normative notion to help determine whether a factual cause is a legal cause, it has usually been used as a synonym for legal cause.³¹

Another question is whether the causation issue relates to the merits or to the quantum of compensation. The question turns on whether proving the occurrence of an injury is necessary for establishing a State’s international responsibility in international investment law.³² If it is necessary, then it is a merits issue because a causal link between the State’s conduct and the injury will have to be proven.³³ If not, then causation is deferred to the quantum stage, assuming that the investor seeks out compensation.

The ILC has clarified that injury is not necessarily a prerequisite to international responsibility. Whether it is necessary depends on the primary rule in question.³⁴ An example of such a rule is the standard on expropriation³⁵ because the investor must prove a substantial deprivation³⁶ of its investment for its breach.³⁷ Other tribunals have taken a different view.³⁸ As their usual formulations do not specify that the State conduct must cause an injury, it is an open question whether the other investment protection standards require proof of an injury for their breach.

If the arbitral tribunal classifies causation as a merits issue and the investor fails to prove the causal link, this failure will be fatal to the broader success of its cause of action. This classification only applies to the particular cause of action where causation is viewed as a merits issue. For any other causes of action advanced by the investor, for which causation is not classified as a merits issue, this failure will have no effect. It would be unusual, however, for an arbitral tribunal to read in the necessity to prove a causal link to one cause of action, but not any other causes of action.

Unless the investor’s cause of action is a breach of the standard on expropriation, in which case the investor’s injury is the deprivation of its investment, the relevant injury that the State’s conduct must cause is often the devaluation of the investor’s investment.³⁹ Accordingly, if causation is relevant to the merits, then the investor will usually have to prove that the State’s conduct caused this injury to establish the latter’s international responsibility.⁴⁰ As regards investment losses⁴¹ other than the devaluation of the investment, their causal link to the State’s conduct will be an issue for determination in the quantum phase.⁴²

If an arbitral tribunal views causation as relevant to quantum, the practice is to determine whether a causal link can be established in respect of each investment loss that the investor claims compensation for.⁴³ If the investor fails to establish a causal link in respect of one particular investment loss, it can still prove causal links in respect of other investment losses.⁴⁴

As most arbitral tribunals have adopted this practice, they side with the view that causation is an issue relating to quantum.⁴⁵ There are, however, some notable exceptions⁴⁶ where arbitral tribunals have analysed causation as a merits issue.⁴⁷ Additionally, some scholars have opined that as injury is a necessary part of a State’s international responsibility in international investment law,⁴⁸ causation must be an issue relevant to the merits.