Desert Line Projects LLC v The Republic of Yemen: Arbitral Tribunal awarded US$1 million as moral damages because Yemen was at fault.

Summary and business impacts

On 6 February 2008 a Tribunal constituted under the rules of the International Centre for the Settlement of Investment Disputes (ICSID) ordered the Republic of Yemen to pay Omani construction company Desert Line Projects total damages of US$24 million. The dispute brought under the Oman-Yemen Bilateral Investment Treaty (BIT) was one of the first disputes between two Arab parties. The case has provoked considerable interest since the compensation awarded included "moral damages" of US$1 million. The amount concerned can be considered as primarily a symbolic gesture, given its proportion of the overall value of the project. Nonetheless, as moral damages have rarely been awarded at ICSID, and never to a company as opposed to an individual, this is a highly significant development.1

The decision is also noteworthy for its treatment of the formalistic requirements for establishing an investment set out in the BIT. The Tribunal refused to deny jurisdiction to Desert Line on the basis that it had failed to comply strictly with its obligations in this regard.

Facts

Desert Line began building roads in Yemen in 1997. The project met with approval and, at the President's invitation, the company proceeded to enter into a number of contracts with the Yemeni government. However, no payment was made in respect of completed contracts. In the meantime, works were interrupted by the sub-contractor and Yemeni officials forced Desert Line to close its operations. Yemeni armed forces, along with members of the local council and local tribes, confronted and threatened Desert Line's personnel by open firing with automatic weapons and removing Claimant's equipment.

Desert Line sought relief in arbitration in the Yemen and an award was rendered in its favour. The Yemeni government, however, failed to comply with the award and interfered with its enforcement. Moreover, it effectively coerced Desert Line into signing a settlement agreement for a much lower sum, prompting Desert Line to file a request at ICSID.

Tribunal's Finding

Moral damages

According to the Tribunal, the Yemeni government had violated its obligation in the BIT to afford investors "fair and equitable treatment". In this regard it noted, in particular, the physical duress exerted over the executives of Desert Line, which substantially prejudiced and affected their physical health and harmed their company's reputation. Since Yemen's actions were malicious, the tribunal concluded that its liability was "fault based". Therefore it found that Yemen was liable to make reparation for the injury suffered by the claimant whether moral or material. The International Law Commission Articles on State Responsibility, which allow for moral damages in some scenarios, played an important role in formulating the Tribunal's decision. Moral damages have a long history in public international law, even though they are far less commonly found in investment arbitrations.

Formal requirements

Yemen challenged the Tribunal's jurisdiction on the basis that the investors did not hold an "investment certificate" as required under the BIT. The Tribunal found that the lack of certificate should not prevent jurisdiction because:

  • the investment had been accepted by lengthy dealings, including endorsement of the project by the President himself;
  • if Desert Line had asked for a certificate it would, in all likelihood, have been given one;
  • BITs should be construed liberally towards the investor.

Conclusions

Whilst there is no binding precedent in ICSID cases, it may be useful for overseas investors to note this tribunal's pro-investor stance as far as compliance with national registration requirements is concerned. As regards damages, this case is interesting in that the tribunal used the BITs to protect human rights as well as protecting to the investment by compensating for financial losses.