The International Court of Justice’s Verdict in Diallo: Part One

On 30^th November, 2010, the International Court of Justice [“ICJ”] delivered its judgment in the merits phase of the Case Concerning Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo) [Hereinafter “Diallo”]. Readers may well wonder about the relevance of an ICJ decision, dealing with principles of public international law, to Indian corporate law and business. The brief answer is that Diallo dealt with the deeply contested right of States to exercise diplomatic protection on behalf of business and corporate investors whose persons, as well as companies and investments, had been expelled, detained, nationalized, confiscated, expropriated or otherwise interfered with by the State in which they were based. Diallo also dealt with the nature of the rights in question, and whether they belonged to the company or its shareholders. In light of the fact that in recent years, India has rapidly become both a destination for foreign investment, as well as the State of nationality of investors expanding into foreign markets, the international law on diplomatic protection and substantive corporate rights, has assumed a vital and indispensable role in the Indian commercial world.

Unless otherwise stipulated by a treaty, there are two situations which provide States with legal standing to bring a claim in the ICJ, or another international forum. The first, which we are not concerned with here, is a case where a State’s direct rights have been violated (e.g., use of force against a State’s territorial integrity). The second, which is relevant for our purpose, is situations in which the nationals of a State are injured by another State, or its agents. Since the default rule is that individuals are not subjects of international law (subject, no doubt, to certain well-defined exceptions), and therefore are not entitled to pursue a claim in the international legal sphere, States are entitled to represent their nationals before the appropriate forums. This is known as the right of diplomatic protection.

The right of diplomatic protection, when applied to corporations and the relationship between corporations and individuals, throws up some interesting questions. What is the test for determining the nationality of companies operating across jurisdictions? More importantly, in light of the principle of separate legal personality of corporations, known throughout diverse legal systems, what rights are deemed to belong to a company, and what rights to its shareholders? The answer, obviously, will directly affect the issue of diplomatic protection. Most often, it will so happen that the State responsible for the alleged infringement of rights will also be the national State of the company. This leaves the issue of defining the scope and ambit of the rights in question a rather vexed one.

The seminal ICJ case dealing with this issue was Barcelona Traction Light and Power Company (Belgium v. Spain), decided in 1970. Barcelona Traction Ltd. was a company incorporated and having its head office in Canada, a majority of whose shareholders were Belgian nationals, and who had a number of subsidiaries operating in Spain. The Spanish government took various actions which resulted in the eventual bankruptcy of Barcelona Traction’s subsidiaries. The question before the Court was whether Belgium, appearing on behalf of its national shareholders in Barcelona Traction, had the legal standing to impugn the Spanish government’s actions. Belgium’s argument was that its nationals had been deprived of control over the companies as well as their property, and that damage to the company had resulted in damage to them as well – thus injuring their independent rights as shareholders.

The Court held that in the corporate entity was primarily a municipal law concept, and would have to be incorporated into the international domain as such. Thus, the Court used municipal law – in particular, the concept of separate legal personality – to draw a distinction between shareholders’ rights and company rights. It drew a further distinction between a “right” and an “interest”, and held that while damage to a company in the form of bankruptcy or confiscation of property may affect a shareholder’s interest, it did not touch any legally enforceable right vested in him. Examples of such rights would be the right to receive dividend, the right to vote etc.

This harshness of this rule was mitigated by providing for two exceptions: where the company ceased to exist, or where the national State of the company lacked the legal capacity to exercise diplomatic protection. If, on the other hand, these exceptions did not apply, and the national State of the company chose not to exercise diplomatic protection, the shareholders would have no remedy in international law.

The numerous criticisms of the dictum in Barcelona Traction, and the arguments that international law has moved away from such a standard, need not detain us here. It may, however, be briefly noted that the International Law Commission’s Draft Articles on Diplomatic Protection provide for a third exception to the Barcelona Traction rule: a situation where the national State of the company is itself responsible for the alleged violation of rights. The legal force of this rule is, however, hotly disputed.

This is the legal framework within which the ICJ’s decision in Diallo may be analysed. Mr. Ahmadou Sadio Diallo was a Guinean citizen, who settled in the Congo in 1964. There, he founded two companies. After engaging in numerous litigations for various debts owed to his companies by Congolese entities, Mr. Diallo was arrested, detained, and finally expelled from Congo (Zaire) in 1996. The question was whether and to what extent his rights as a shareholder and controller of his companies had been violated, vesting in Guinea a right of diplomatic protection to bring forward claims of that nature. In the admissibility phase of the proceedings in 2007, the Court declared that Guinea had the right of diplomatic protection insofar as it related to the protection of Mr. Diallo’s direct rights in his companies. The question of what constituted direct rights in the companies was for the Court to decide in the merits phase, and that is what will be discussed in the next post.