Diallo: Part Two

Written by  //  December 15, 2010  //  Corporate Law and Business  //  3 Comments

In the previous post, we had introduced the recent ruling of the International Court of Justice in Ahmadou Sadio Diallo, in the context of State action with respect to foreign companies and foreign investments. We may now undertake an overview of the principle legal issues involved in the Merits Phase of Diallo. It will be recalled that the factual background was, simply, this: Mr. Diallo, a Guinean citizen, had founded two companies in the Congo. Allegedly due to his involvement in attempting to recover monies owed to his companies, he was arrested, detained and ultimately expelled from the Congo in 1996. Guinea approached the Court with a view to protecting the rights of Mr. Diallo, and the Court ruled, as a preliminary issue, that Guinea had standing under the rules of diplomatic protection, to bring the case before the Court. Subsequently, the question that the Court was called upon to answer in Diallo (Merits) was whether and to what extent the Congolese’s actions against Mr. Diallo amounted to violating his rights as a “geraint” (manager) and an “associe” of his companies.

After the preliminaries (paragraphs 1 – 14), an account of the factual matrix follows (paragraphs 15 – 20), and then a brief foray into the human rights and consular rights violations (paragraphs 49 – 99), none of which need concern us here. It is then that the Court comes to the issues of immediate relevance. It was argued by Guinea that the all-pervasive nature Mr. Diallo’s powers over the companies mandated a finding that both “in fact and in law”, the companies could be equated with Mr. Diallo himself. The Court rejected this argument on two levels: first, it cited the Barcelona Traction to highlight the importance of the relevant municipal law (in this case, Congolese law) in determining to what extent the concept of separate legal personality was prevalent. An argument was made, however, that under Congolese law Mr. Diallo was in complete “factual charge and control” over the companies (in particular, the legal position of an “associe”). The Court’s response to this, the second level of argument, was interesting, and deserves to be quoted in full:

In the following paragraphs, the Court is careful to maintain the strict distinction between the alleged infringements of the rights  of the two SPRLs at issue and the alleged infringements of Mr. Diallo’s direct rights as associé of these latter… the Court understands that such a distinction could appear artificial in the case of an SPRL in which the parts sociales are held in practice by a single associé.  It is nonetheless well-founded juridically, and it is essential rigorously to observe it in the present case.

It is submitted with respect that the above paragraph is somewhat unclear. Once the Court had abandoned reference to Congolese law, “juridical foundation” is no ground to hold a principle valid under international law. It was open to the Court to take the path at least impliedly taken by Barcelona Traction, and argue the concept of separate legal personality (and by implication, the distinction between rights enjoyed by a company and rights enjoyed by a shareholder in that company) is a general principle of law recognized by civilized nations (Art. 38(1)(c) of the Statute of the International Court of Justice). In order to sustain such a holding, however, the Court would have been bound to look at a number of diverse municipal legal systems, and cull out certain principles. It did not.

In any event, it would now seem to appear that notwithstanding a directly contrary provision in the municipal statute (in which case the position remains unclear), the Court will use the broad common law concept of separate legal personality to draw clear dividing lines between company rights and shareholder rights, despite extensive ownership and factual control.

The next contention raised by Guinea was that his arrest and expulsion amounted to a denial of his direct right to take part in the general meeting, and vote accordingly. Here, the Court accepted the legal argument, once again upon the twin bases of domestic Congolese law and the verdict in Barcelona Traction, that such rights were indeed individual rights, and enforceable. However, it found on fact that no general meetings had actually been convened, and in any event, the possibility of voting through proxy militated against Mr. Diallo’s claims. Other similar claims based upon violations of the right of management were also rejected on fact.

The next interesting argument raised by Guinea was that the “creeping expropriation” initiated by Congo had violated Mr. Diallo’s property rights in his companies. While it is impossible to go into the law of expropriation here, it may be stated in brief that Guinea’s argument was that the falling value of investment in the companies, and their near-bankruptcy, had resulted in a position where Mr. Diallo “was lastingly deprived of effective control over, or actual use of, or value of those rights.” Once again, the Court’s response deserves to be quoted in full:

“The Court observes that international law has repeatedly acknowledged the principle of domestic law that a company has a legal personality distinct from that of its shareholders. This remains true even in the case of an SPRL which may have become unipersonal in the present case.  Therefore, the rights and assets of a company must be distinguished from the rights and assets of an associé.  In this respect, it is legally untenable to consider, as Guinea argues, that the property of the corporation merges with the property of the shareholder. Furthermore, it must be recognized that the liabilities of the company are not the liabilities of the shareholder…”

Lastly, an argument made as to the bankruptcy of the companies, and its practical effect on Mr. Diallo, was rejected, the Court citing Barcelona Traction with approval for the proposition that “company’s status alone in law is relevant, and not its economic condition, nor even the possibility of it being practically defunct.”

The above observations, along with the judgment’s repeated affirmation of Barcelona Traction, decided 40 years ago, raise some interesting food for thought with respect to the international law on diplomatic protection for companies and shareholders, and the enforceability of shareholders’ and company rights in cases of adverse State action before an international tribunal.

3 Comments on "Diallo: Part Two"

  1. Arghya December 20, 2010 at 7:57 am ·

    Bhatia, excellent summary. I’m curious- was it an unanimous opinion of the court on merits? Given the record of the ICJ, if it was an unanimous opinion, that would have significant weight going forward in terms of the law laid down.

  2. elena December 28, 2010 at 4:07 pm ·

    Hey. Great comment.

  3. Gautam January 8, 2011 at 4:44 pm ·

    Hi Arghya,

    No indeed, it wasn’t unanimous. Judge Trindade appended a separate opinion, where he discussed the human rights aspects of the case in great detail. Judges Al-Khasawneh, Yusuf and Bennouna dissented. Indeed, Judge Bennouna makes the following interesting observation:

    “It is true that, according to the Barcelona Traction jurisprudence, there is a distinction between the rights of shareholders and those of the company, so that an infringement of the latter does not necessarily involve a breach of the former (Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain), Second Phase, Judgment, I.C.J. Reports 1970, p. 36, para. 46). However, a forced separation between the sole associé and his company is likely to result in a violation of the rights of both. Since that associé has been prevented from exercising his rights, the company will be like a ship without a rudder and will inevitably founder; that was to be the case with Africom-Zaire and Africontainers-Zaire.”

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