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Political violence and PRI

By Mark Kantor, Michael D. Nolan & Karl P. Sauvant


The conversation in the new and old media over the last several weeks has been dominated by reports about uprisings in Tunisia, Libya and Egypt and violent clashes in Bahrain, Yemen, the Ivory Coast, Iraq and elsewhere. In Libya, fighting currently is reported to take place close to strategic oil installations. Because of the scarcity of claims arising out of similar events in investor-state arbitration, political risk insurance claims determinations by the U.S. Overseas Private Investment Corporation (OPIC) can play an important role to develop this area of law and fill these gaps in future investor-state arbitral arbitrations.

OPIC has a long history of dealing with claims under political risk insurance policies arising from political violence. Its first political violence claims arose as a consequence of the rebuilding efforts by the Organization of American States following political strife in Dominican Republic in 1967.  Early claims included a 1968 claim arising out of war damage to an extension of Jerusalem airport.  Since then, OPIC has addressed political violence claims relating to projects in inter alia Pakistan, Bangladesh, Chile, Indonesia, Nicaragua, Haiti, the Philippines, Rwanda, Democratic Republic of Congo, Sierra Leone, Gaza, Colombia and Afghanistan.  These claims concerned damages suffered as a consequence of declared war, violent secessions, military coups, civil war, or revolution.  The variety of the different situations encountered in OPIC claims determinations provides valuable insight into how political violence can and does affect foreign investments.

One key element that OPIC determinations have spent significant time addressing is attribution to establish who is responsible the underlying act of violence and for what purpose it was committed. Was violence committed by a group that was trying to overthrow the government, was it committed by a group that was under the control of a government? Or was the violence non-political in nature and as such not covered by the OPIC policy?

The OPIC claims determination with respect to the Freeport mining project in Indonesia is perhaps particularly on point for current events.  Freeport Indonesia was engaged in mining activities in the area then known as Irian Jaya (now West Papua), a province of Indonesia on the island of New Guinea The area in which Freeport Indonesia operated became part of Indonesia only after negotiations between the Netherlands and Indonesia.  A year after Irian Jaya was joined to Indonesia, various dissident groups, known as the Organisasi Papua Merdeka (“OPM”) formed for the purpose of asserting independence. 

In 1969, a first uprising took place, which did not damage Freeport Indonesia facilities.  In 1976, though, Freeport Indonesia received letters from OPM demanding assistance in a renewed insurrection expected in spring of 1977.  That uprising would reputedly be joined by a major invasion of nationalist forces from neighboring Papua New Guinea.  An uprising did occur in 1977, including in the area of Freeport Indonesia’s facilities.  Government of Indonesia armed forces were sent to quell the insurrection.  The military apparently used Freeport Indonesia facilities as a base of operations.  During the period from July 23, 1977 to September 7, 1977, Freeport Indonesia’s facilities suffered damage during acts of sabotage and attacks. Because the partisans shared a common purpose to assert independence, OPIC determined that the loosely affiliated OPM did constitute a revolutionary force despite its lack of a clear command structure. OPIC further applied a “preponderance” test, weighing the evidence available to OPIC to establish whether it was more likely than not that the harm done to Freeport’s facilities was the result of OPM attacks or other causes.

By contrast, the burgeoning jurisprudence under international investment agreements so far has had relatively limited occasion to examine political violence claims. The two significant exceptions, AAPL v. Sri Lanka (1990) and AMT v. Zaire (1997), examined whether the government’s conduct with respect to political violence conformed to the international law standard of “full protection and security” in the underlying bilateral investment treaty. In interpreting the underlying treaty provisions, both tribunals rejected a strict liability standard for purposes of the treaty. (AAPL, at ¶ 50; AMT, at ¶6.05.) Both tribunals instead adopted a standard of “diligence”, meaning “the reasonable measure of prevention which a well-administered government could be expected to exercise under similar circumstances”, (AAPL, at ¶ 77 (quoting Professor Freeman)) or “vigilance”, meaning that the host state “must show that it has taken all measures of precaution to protect the investments … on its territory” (AMT, at ¶ 6.05.) 

The AAPL tribunal found that Sri Lanka had failed to meet the “diligence” threshold, when Sri Lankan military forces attacked the installation without first communicating with the investor about excluding rebel forces from the installations. The tribunal in AMT concluded that Zaire too failed in its “vigilance” obligations towards AMT because it failed to take any measures to stop repeated looting by armed forces Zaire admitted to have known about. Notably, some commentators have identified disagreements about the exact scope of the protection in both cases (Rubins/ Kinsella, 220-221.) But “diligence” or “vigilance” obligations can be applied only with difficulty to recent events in States like Egypt, Tunisia and Libya because there is no clear organized rebel force to which the State’s “vigilance” or “diligence” obligation can easily be applied.

Applying OPIC’s test from its Freeport claims determination, counsel might conclude that many of the current news events may indeed well be covered by the political violence coverages in political risk insurance policies. The OPIC determination offers precedent for classfiying damage resulting from engagements with loosely affiliated revolutionary groups as a covered event.

Whether or not investment treaty arbitration provide an effective remedy against damages incurred by an investor in all such situations may be a different question.  In some cases, the analyses in AMT and AALP point towards recovery of some damages.  But in other cases, these arbitration awards may simply leave too many issues unaddressed for a business to know with reasonable certainty the extent of its protection. In those instances, reference to the OPIC materials may be helpful context for the determination of questions in bilateral investment treaty cases. Investors making an investment decision for future investments in one of the troubled countries should therefore seriously consider adding political risk insurance to their risk mitigation portfolio.

Mark Kantor, International Arbitrator, Michael D. Nolan, Partner, Milbank, Tweed, Hadley & McCloy LLP, Adjunct Professor, Georgetown University Law Center, and Karl P. Sauvant, Executive Director, The Vale Columbia Center on Sustainable International Investment (VCC) are the editors of Reports of Overseas Private Investment Corporation Determinations, a comprehensive two-volume collection of determinations from OPIC, the US governmental political risk insurance provider, in the form of its Memoranda of Determinations from 1966 through to 2010.

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  1. Brian Hasbrouck

    This is so cool! When is it released? I can’t wait to dig into this material.

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