Ukraine: Claims of German companies and investors

Claims for damages against the Russian Federation: How can German companies and investors assert damages suffered in court?

The aggression of the Russian Federation in violation of international law has had and will continue to have an immense impact on the global economy. German companies that conduct business activities in the Russian Federation or own subsidiaries or interests in companies there are also affected. They are indirectly harmed due to the sanctions imposed on the Russian Federation. Furthermore, due to the overall situation, some companies have decided to withdraw from Russian business and close operations temporarily or permanently. In addition to the resulting damage, they are threatened with expropriation by the Russian Federation.

In view of this military escalation, which the 21st century has not seen in any precedented form, the question arises as to whether and to what extent the Russian Federation will be liable to harmed companies. Despite some - but manageable - hurdles, a claim against the Russian state is legally possible and enforceable both under civil law before German national courts (see I. below) and, pursuant to the Investment Protection Treaty between Germany and the Russian Federation before international arbitration courts (see II. below).

I. Civil Law Claims for Compensation against the Russian Federation and their Enforcement before German Courts of General Jurisdiction

The questions of whether the Russian Federation can be sued before national courts at all under the aspect of so-called state immunity under international law, and whether German law applies, are decisive for the successful enforcement of claims for compensation under civil law.

Objection: State Immunity

State immunity is the main pillar of the international and international legal order. According to its principle, equals should not be able to exercise dominion over equals. Until the end of World War I, the concept of absolute state immunity meant that states were subject to international law alone. In particular, a state could not be sued in the national courts of another state. This understanding has been modified through globalization. There is consensus that, in the case of purely fiscal actions, a state, as a subject of the world economic market, can also be sued in national courts.

Other breaches of sovereign immunity are also discussed. For example, in a 2012 case before the International Court of Justice (ICJ), Italy argued, among others, that Germany could not invoke its sovereign immunity in the contested case of an Italian who was deported to Germany in 1944 and forced to perform forced labor there, because the acts in question would constitute crimes under international law.

The reason for rejecting this argumentation, according to the ICJ, was primarily that there was no room for individual compensation in the state practice of reparation treaties between states. Germany had already assumed responsibility and had fulfilled its obligation to provide reparations to the extent required.
The situation of the Russian Federation, however, proves to be almost diametrically opposed to this. The Russian Federation has so far denied any responsibility. Nor is there any prospect of an intergovernmental reparation agreement in favor of Ukraine. The Russian aggression violates the fundamental values of international law, so that the Russian Federation has simply lost the privilege of state immunity. From the point of view of aggrieved companies, their recourse will be the primary avenue of legal action. Accordingly, general considerations of legality also speak against the effective invocation of Russian sovereign immunity.

The approach to German courts

Pursuant to the relevant Code of Civil Procedure, a German court also has international jurisdiction to assess resulting claims for damages based on the fact that assets of the Russian Federation are located on the territory of the Federal Republic of Germany and that many damages did not occur in Ukraine but in Germany because of indirect effects.

German Tort Law vs. Russian State Liability Law

Whether German courts have to apply German - or alternatively Ukrainian - tort law or Russian state liability law primarily depends on the legal classification of the acts in question. Assuming, in line with historical legal practice, that military actions always constitute the exercise of sovereign authority, the application of Russian state liability law would be unavoidable.

In today's understanding, however, a war - unlike in the historical context - does not simply arise unpredictably and without any influence. The predominant focus of state international action is increasingly on private law. The war of aggression against Ukraine was deliberately launched by the Russian Federation in full knowledge of all possible outcomes as an actor in the modern world community. Consequently, the Russian Federation - like any other non-sovereign actor - must answer in tort for any damage caused.

It would rather contradict the principle of state immunity if the Russian Federation were entitled to corresponding sovereign powers, although under international law one state is not supposed to have sovereign powers over the other. However, this would have to be assumed on the assumption that extraterritorial military actions are the exercise of sovereign authority.

Direct and indirect damages

The destructive aggression of the Russian Federation causes innumerable damages. German tort law offers, depending on the case constellation, promising ways to establish and enforce a claim for compensation against the Russian Federation.

In our view, the deliberate damages are the fault of the Russian state and are legally attributable to it. The same applies regarding violations of international criminal law; namely, aggression in violation of international law as one of the so-called core crimes. The army of the Russian Federation frequently and unprovoked destroys civilian targets and infrastructure. These military excesses are obviously not stopped by the commanders. Rather, they seem to be part of the Russian Federation's military strategy, especially from a historical perspective. Last but not least, the Russian Federation is guilty of organizational culpability under civil law in connection with the commissioning of other (private) groups in the Ukraine war.

Enforcement against Russian Assets

Regarding enforcement in the event of a successful civil court trial, the question of conflicting sovereign immunity repeatedly arises. In this respect, however, a distinction must be made as to whether the assets are to be allocated to the sovereign activity of the state (enforcement would be contrary to international law) or whether it is a matter of enforceable assets held by the state as a treasury.

II. Claims under the Investment Protection Treaty between Germany and the Russian Federation, their enforcement and execution

In addition, German investors may have claims against the Russian Federation under the Bilateral Investment Protection Treaty between the Russian Federation and Germany (Treaty between the Federal Republic of Germany and the Union of Soviet Socialist Republics on the Promotion and Reciprocal Protection of Investments of June 13, 1989 - "BIT DE-RUS").

Protection on Ukrainian territory

The destruction of or damage to operational buildings and resources, such as computer equipment, machinery, vehicles and other objects by military attacks constitute an unlawful expropriation without compensation of the property of German investors in capital assets protected by the BIT DE-RUS (Art. 1 para. 1 BIT DE-RUS). Indirect interventions that lead to the impairment or standstill of the business activities of companies in Ukraine may also constitute indirect, de facto expropriations. In addition, so-called portfolio investments in the form of pure equity investments equally fall within the scope of protection of Article 2 para. 2 in conjunction with Art. Art. 4 para. 1 BIT DE-RUS. Consequently, losses in value of shareholdings in companies and other investments are also protected, so that direct or indirect interventions can lead to expropriations.

The applicability of the BIT DE-RUS is likely to extend - with recourse to the reasoning of international arbitral tribunals in connection with the annexation of the Crimean Peninsula - to Ukrainian territory in which the army of the Russian Federation exercises or attempts to exercise control in violation of international law. It is questionable whether investments in areas of Ukraine that the army of the Russian Federation attacks to bring them under its control are also covered. This should also be affirmed since investment protection agreements also have protective effects in favor of third parties (the investors) (Art. 2 BIT DE-RUS).

Protection on the Territory of the Russian Federation

Investors on the territory of the Russian Federation may also be entitled to claim compensation under certain circumstances. In particular, aircraft leasing companies and their insurers whose aircrafts have been unlawfully transferred to Russian airlines by state decrees have been affected to date. Other direct or indirect measures by which investors have been deprived of or restricted in their power over the ownership of investments are also likely to be subject to expropriation protection. With the withdrawal of numerous companies from the Russian market, the question arises to what extent an investment is protected by the BIT DE-RUS. In principle, an investment is subject to the protection of the BIT DE-RUS during its entire life cycle (from establishment to liquidation - including the free transfer of liquidation proceeds). Thus, investments are subject to the full protection of the BIT DE-RUS until their complete liquidation. Any (unlawful) infringements of property would accordingly give rise to claims for compensation. So far, the question whether the Russian Federation is also liable for the effects on investments due to the sanctions imposed against it or the exclusion from the SWIFT network as a causal consequence of its conduct in violation of international law is completely unresolved. This depends on the extent to which the direct and indirect consequences of the conduct in violation of international law can be attributed under the principles of the Draft Articles on Responsibility of States for Internationally Wrongful Acts (ASR). These provide for far-reaching responsibility.

Full compensation for damages

In the case of unlawful expropriations, such as war-related expropriations, compensation according to the principles of Art. 4 para. 2 BIT DE-RUS does not seem appropriate. International arbitral tribunals therefore take recourse, especially in cases of unlawful indirect expropriation or confiscation, to the principles of the Chorzów decision of the Permanent Court of International Justice in The Hague (StIGH) or the principles of Articles 35 et seq. ASR. The reparation function of compensation justifies granting comprehensive compensation for value in such cases. Investors are to be put in the same financial position as they would have been in without the damaging event. This also includes the lost profit of an investment (cf. Art. 36 ASR).

Enforcement by way of investor-state arbitration before an international arbitration court

Such claims can be asserted by way of investor-state arbitration proceedings before an international arbitration court. In particular, the Permanent Court of Arbitration of the ICJ in The Hague (PCA), the Permanent Court of Arbitration of the International Chamber of Commerce in Stockholm (SSC) or the Permanent Court of Arbitration of the International Chamber of Commerce (ICC) in Paris can be used. Although the SCC Court of Arbitration is a respected institution in disputes against the Russian Federation and is recognized by all parties, it has not yet been invoked in the Crimea cases. Here, the arbitral tribunal of the PCA is leading and therefore preferable in case of possible disputes in connection with the BIT DE-RUS due to expropriations on Ukrainian territory. Lastly, the previous rulings of differently constituted panels were mostly investor friendly. In the Crimea cases, the Russian Federation did not participate in the arbitration proceedings. Nevertheless, the proceedings were conducted in an orderly manner. Only during the recognition and enforcement of the arbitration awards did the Russian Federation defend itself, mostly unsuccessfully, before the national courts. Therefore, it is expected in future proceedings that the Russian Federation will change its strategy and defend itself already in the arbitration proceedings. In view of the numerous international investigations against President Putin and other members of the government for crimes under international criminal law, it is important when choosing the place of arbitration that the Russian Federation and its representatives must be able to enter and participate in the proceedings without impediment.

Recognition and enforcement of foreign arbitral awards

Arbitral awards are recognized in the 168 contracting states to the New York Convention of June 10, 1958, on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and can thus be enforced internationally. However, the enforcement of arbitral awards under the New York Convention is also subject to possible restrictions regarding the sovereign immunity, depending on the subject matter of enforcement and the law of the respective jurisdiction.

_{Published: April 2022}