This article is written by Aditi Singh.

Barcelona Traction, Light and Power Company, Limited (BTLPC) was incorporated in Toronto, Canada in 1911 for the purpose of creating and developing an electric power production and distribution system in Catalonia, Spain. In 1936, the Spanish government suspended the BTLPC bonds, issued principally in Sterling, on account of the civil war in Spain.

After the war the Spanish exchange control authorities refused to authorize the transfer of the foreign currency necessary for the resumption of the servicing of the Sterling bonds. Thereafter in 1948, by an order of the court of Reus, the company was adjudged bankrupt. The Belgian government filed an application in 1962 claiming reparation for the losses suffered by the Belgian shareholders of the company as a result of the acts committed contrary to the international law by various organs of the Spanish State.

On the other hand, the Spanish State contended that the claims of Belgium were inadmissible and unfounded. The Spanish State put forward four preliminary objections out of which the first and second objections were rejected by the court and the third and fourth were joined to the merits.

The first and second preliminary objections were to the effect that the discontinuance of the previous proceedings by Belgium precluded it from instituting the present proceedings and that the court did not have the jurisdiction to adjudicate upon the Belgian claims.

The third preliminary objection submitted by Spain was that the Belgian government lacked the capacity to submit any claims in respect of wrongs done to a Canadian company even if the shareholders were Belgian. In other words, the Belgian government did not have the jus standi. The fourth preliminary objection raised by the Spanish government was to the effect that the local remedies available in Spain were no exhausted.

ISSUE

Can a State extend diplomatic protection to its nationals who are shareholders in a company incorporated in another State if the interests of the shareholders are affected as a result of a wrong committed against the company?

First Preliminary Objection – Discontinuance of Proceedings Precludes the State from Instituting New Proceedings

The Spanish government (Respondent) advanced four arguments in support of its first preliminary contention that the discontinuance of the proceedings in 1961 by the Belgian government (Applicant) precluded it from instituting the present proceedings.

• The first argument put forward by the Spanish government and accepted by the court was to the effect that the discontinuance of the proceedings was a purely procedural act the real significance of which must be sought in attendant circumstances.
• The second argument advanced by Spanish government was that discontinuance must always be taken to be signifying renunciation of any further right of action unless the right to start new proceedings is expressly reserved.

The court observed that the first and the second contentions are mutually contradictory as the notice of discontinuance of proceedings cannot both be in itself a purely procedural and neutral act, and at the same time, be prima facie and in principle, a renunciation of claim.

• The third argument advanced by the Respondent stated that when the representatives of the Belgian interests approached the representatives of the Spanish interests to reopen the negotiations, they were met with a refusal to do so unless there was a withdrawal of the claim was by the Belgian government. There was an understanding between the Spanish and the Belgian sides that the discontinuance would put a final end to the claim. The contention was denied by the Applicant contending that nothing was intended other than the termination of the proceedings. The court did not accept this argument as well and stated that the exchanges relied upon by the Respondent took place almost entirely between the representatives of the private interests concerned. And that in order to bind the governments on either side it must be shown that the representatives acted in such a way as to bind their governments which has not been established by the Respondent.
• The fourth argument advanced by the Respondent was in the form of the plea of estoppel. It contended that the Applicant misled the Respondent about the import of the discontinuance due to which the Respondent agreed for negotiations and thus suffered prejudice. This contention was not accepted by the court. The court observed it cannot be seen what the Respondent stood to lose by agreeing for the negotiations on the basis of discontinuance. Had the Respondent not agreed for negotiations, the proceedings would still have continued whereas negotiations offered the possibility of finally settling the whole dispute.
• In the fifth and final argument the Respondent contended that the present  proceedings were contrary to spirit and economy of the Hispanic-Belgian Treaty of July 19, 1927 which required that before a dispute was submitted for adjudication, various preliminary stages had to be gone through. These stages were gone through in the original and discontinued proceedings and were repeated in connection with the present proceeding which could not have been the intention of the Treaty. Therefore the present proceedings are out of order. Rejecting this argument the court observed that the treaty processes could not have been regarded as exhausted so long as the right to bring new proceedings existed otherwise and until the case has been prosecuted to judgment. Thus the court rejected the First Preliminary Objection raised by the Respondent.

Second Preliminary Objection – Lack of Jurisdiction

In order to establish the jurisdiction of the court, the Applicant relied on the combined effect of Article 37[i] of the Statute of the Court and the fourth paragraph of Article 17[ii] of the Hispanic-Belgian Treaty of Conciliation, Judicial Settlement and Arbitration (1927).

The Applicant contended that the 1927 Treaty being Treaty in force and both the parties in the dispute being the parties to the Statute of the International Court of Justice, the court must by virtue of Article 37 be deemed to have replaced the PCIJ in relations between the parties.

The Respondent objected to this contention of the Applicant stating that the 1927 Treaty might still be in force but Article 17(4) has lapsed on the dissolution of the Permanent Court of International Justice (PCIJ) in 1946. It contended that Article 37 applied only between the States who had become parties to the Statute prior to the dissolution of the PCIJ and Spain having been admitted to the United Nations in 1955 was excluded from its purview.

It further contended that the dissolution of the PCIJ had brought about the extinction of the jurisdictional clauses providing for the recourse to the PCIJ unless they had previously been transformed by the operation Article 37 into clauses providing for the recourse to the present court.

Regarding this contention of the Respondent the court observed that the drafters of Article 37 had intended to preserve as many jurisdictional clauses from becoming inoperative by reason of prospective dissolution of the PCIJ.

Article 37 mentions three conditions- Firstly, there should be a Treaty or Convention in force, secondly, it should provide for the reference of a matter to the PCIJ, and thirdly, the dispute should be between the States both or all of which are parties to the Statute.

Therefore in the present case, the 1927 Treaty being in force and containing a provision for reference to the PCIJ and the parties to the dispute being parties to the Statute, the matter could be referred to the International Court of Justice which was the competent forum.

It was objected by the Respondent that this view would lead to a situation in which the jurisdictional clause concerned was inoperative and then after a gap of years became operative again.

To this the court replied that the notion of rights and obligations in abeyance (suspension) but not extinguished was common. States becoming parties to the Statute after the dissolution of the PCIJ must be taken to have known that one of the results of their admission would be the reactivation by reason of Article 37 of certain jurisdictional clauses. Regarding Article 17(4) of the 1927 Treaty, the court observed that it was integral part of the Treaty.

It would be difficult to assert that the basic obligation to submit to compulsory adjudication provided for in the Treaty was exclusively dependent on the existence of a particular forum. In case the forum went out of existence, the obligation became inoperative but remained substantively in existence and could be rendered operative once more if a new tribunal was supplied by the automatic operation of some other instrument.

For the above mentioned reasons the court rejected the Second Preliminary Objection of the Respondent.

Third and Fourth Preliminary Objections – Jus Standi and the Non-Exhaustion of Local Remedies

The court had joined the third and the fourth preliminary objections to the merits. Addressing the question of jus standi the court observed that a State has an obligation to extend the protection of law to the foreign investments and foreign nationals that it admitted to its territory. However such an obligation is not absolute and in respect of breach of such obligation, a State must establish its right to do so. Where a question relates to an unlawful act committed against a company representing foreign capital, the general rule of international law authorized the national State of the company alone to exercise diplomatic protection for the purpose of seeking redress. The court identified two special circumstances in which the general rule may not take effect:-

1. The case of a company having ceased to exist.
2. The case of the protecting State of the company lacking the capacity to take action.

As regards the first possibility the court observed that while Barcelona Traction has lost all its assets, the corporate entity of the company had not ceased to exist. So far as the second possibility was concerned Canadian nationality of the company had not been disputed.

Canadian government has exercised the protection of the company for many years. If at a certain point the Canadian government ceased to act on behalf of the company, it nonetheless retained its capacity to do so. The inaction of the Canadian government could not constitute a justification for the exercise of the diplomatic protection by another government.

A State could make a claim when investments by its nationals abroad were a part of the State’s economic resources and such investments were prejudicially affected in violation of the right of the State to have its nationals enjoy a certain treatment. In the present state of affairs, such a right could only result from a treaty or a special agreement but no such treaty or agreement existed.

Held

The court observed that adoption of the theory of diplomatic protection of the shareholders would open the doors to competing claims on the part of different States, which would create an atmosphere of insecurity in international economic relations. Thus court held that the Belgium government did not have the jus standi in the present case and therefore it did not find any reason to examine other aspects of the case.

References

[i] Whenever a Treaty or Convention in force provides for reference of a matter…to the Permanent Court of International Justice, the matter shall, as between the parties to the Statute, be referred to the International Court of Justice.

[ii] …either party may on the expiry of one month’s notice, bring the question direct before the Permanent Court of International Justice.