“I don’t like this kind of life where every month you are faced with some kind of a coup”
-Jejomar Binay (former mayor of Makati)
In the early hours on Thursday, 11 April 2019, one imagines the soldiers of the Sudanese Armed Forces storming the lodgings of Omar al-Bashir in Khartoum, where he was being held under house arrest, and detaining him under the authority of the emerging transitional government. Later the same day, Omar al-Bashir was overthrown as Sudan’s President, ending his 30 year-long rule over one of Africa’s largest countries, and marking the commencement of a transitional period in Sudan.
Given the political instability in Sudan over many years, very few established investors would view Sudan as the desired investment destination. China, however, remains Sudan’s largest trade partner, with the majority of trade arrangements having been negotiated with the deposed Al-Bashir’s government. The diplomatic recognition of the post-coup government would inform how such arrangements would run their course.
In the past five to seven years, the world has seen powerful autocratic regimes succumb to military or otherwise non-constitutional takeovers. The Arab Spring of 2011 alone resulted in the collapse of the authoritarian regimes in Libya, Tunisia, Egypt, and Yemen. In other parts of the world, new States have emerged as a result of secession and decolonization. Once colonized territories have gone through dramatic political changes on the way to self-determination.
As a result of these political changes, State contracts entered into between foreign investors and host governments are revisited, prior governments’ obligations are dishonoured, large investment projects are terminated or renegotiated, the assets of sovereign wealth funds remain suspended in foreign bank accounts until the new governments are recognized as legitimate successors of the deposed regimes.
These dramatic developments pose questions of diplomatic recognition and State succession not only for researchers and sensation-hungry journalists, but also for the banks who hold sovereign funds of the deposed governments, for the investors who have ongoing contractual relationships with the outgoing governments, or who are building new relationships with the new governments, and for other stakeholders in the global investment community. The answers to such questions, which are rarely accessible in the public domain, directly affect the livelihoods of those who depend on the economic and political stability of their communities for survival.
In the Belt & Road context, the State succession rules have assumed a timely importance, in particular in South East Asia, Central Asia, and in Africa, where the levels of political volatility have been historically high.
SUCCESSION TO OBLIGATIONS UNDER STATE CONTRACTS
In 2015, long before his dramatic demise, Al-Bashir travelled to China to sign a number of large infrastructure contracts with Chinese State-owned Enterprises. One imagines Al-Bashir travelling in luxury from impoverished Khartoum to prosperous Beijing, to sign arrangements that would provide infrastructure development for projects involving a 1,000 km long railway in eastern Sudan, as well as the development of a military-industrial complex on the outskirts of Khartoum, among other deals.
State succession rules and diplomatic recognition of governments inform what happens with the State’s obligations under State contracts and other agreements concluded between foreign investors and host States, when the government changes or when a new State emerges. The Vienna Convention on Succession of States in Respect of State Property, Archives, and Debts, deals with debt-related issues, but it does not regulate individuals’ relationship with the changing nature of the State.
A successor State’s sovereignty is derived from international law, and not from the predecessor State. O’Connell wrote that “the successor State is entitled to exercise the predecessor’s rights and is obliged to discharge the predecessor duties, because international law so directs.” (O’Connell, State Succession, 1967 (n 15), 32-3). In other words, the legal order of the predecessor State does not simply disappear with the emergence of the successor State. Instead, in the name of coherence of the international legal order, in most circumstances, the successor State is to assume the obligations taken on by the predecessor State.
O’Connell further finds, with respect to State contacts and other arrangements with foreign investors, that “rights acquired under the predecessor State survive [a] change of sovereignty because the law that created them survives.” (O’Connell, Recent Problem of State Succession (n 41), 139).
The rights and obligations so acquired by the successor State must be complied with until they are modified by the successor State. Such modification must happen within the ambit of the applicable law, failing which the conduct of the successor State may be sanctioned (See, A Guide to State Succession in International Investment Law, Patrick Dumberry, p 280, 10-10).
STATE SUCCESSION: THE BASICS
The public international law rules on State succession regulate the continuity of legal obligations of States following political changes in the structure of statehood, where one State effectively replaces another State in the responsibility for the international relations of the territory.
Scholars recognize six types of succession scenarios:
- Unification, where the extinction of a predecessor State results in the creation of another State (the case of the unification of Zanzibar and Tanganyika into modern-day Tanzania in 1964);
- Dissolution, where the extinction of a predecessor state creates multiple independent States (the dissolution of the USSR in 1991);
- Incorporation, where the extinction of a predecessor State does not create a new State but rather enlarges the territory of the successor State (the case of the German Democratic Republic and the Federal Republic of Germany, former East and West Germany, in 1990);
- Secession, where a new State emerges as a result of breaking up from the existing State, leaving the existing State alive despite the loss of a part of its territory (South Sudan in 2011);
- Newly independent states that emerge as a result of decolonization, with the difference from secession being that the territories should not be considered as a part of the colonial powers (India and Pakistan in 1947);
- Cession or transfer of territory, where a part of the territory under the control of one State reverts to the sovereign rule of another State (Macao and Hong Kong).
The degree of continuity of States depends on the type of succession scenario. For example, in the case of dissolution, Russia assumed many of the USSR’s international law obligations. The dissolution-based continuity would be different, however, for the other former USSR republics.
State succession rules, in addition to being of crucial importance for the community of States, also play an important role in investment disputes.
Investment law concerns raised by foreign investors and the accompanying disputes have proven to be more immediate than the rules of public international law. They form investment-related considerations through an ever-growing body of case law.
The first tribunal to deal with the cession question with respect to a bilateral investment treaty was a tribunal constituted under the China-Laos bilateral investment treaty to resolve a dispute between a Macanese investor and the Lao PDR (Sanum v Laos). The question at the heart of the dispute was whether China’s treaty with Laos extended to Macao following the cession of the territory from Portugal to China in 1999. Whether the China-Laos treaty extended to Macao would inform whether a Macanese investor could bring a claim against Laos under the treaty. Ultimately, the question had to be entertained by the Singapore Court of Appeal when the tribunal’s award was challenged before the courts at the seat of the arbitration.
The first case of State succession under Asian investment treaties was WWM v Kazakhstan, where a Canadian investor brought a claim against Kazakhstan under the USSR-Canada bilateral investment treaty. The question, in that case, was whether Kazakhstan was bound by the treaty following the dissolution of the USSR. The tribunal found that Kazakhstan was the USSR’s legal successor to the treaty and was bound by it.
TO WALK THROUGH THE RUINED CITIES OF GERMANY IS TO FEEL AN ACTUAL DOUBT ABOUT THE CONTINUITY OF CIVILIZATION …
It is a risky enterprise to build investor relationships with governments in transition, with non-recognized governments, with newly independent States, and with other political entities that are subject to significant instability. The relationships may yield high gains, but they may also be profoundly destructive.
Investment protection mechanisms, investment treaty planning, investment protections built into the State contracts, stellar political risk insurance, risk mitigation in project finance, and other arrangements, are important considerations for investment projects in high sovereign risk jurisdictions that are prone to political volatility.
One imagines a dilapidated train coming from Port Sudan arriving through a one-track railway into Khartoum’s central train station, tired passengers streaming away from the train cars after their lengthy journey. New sleek trains are a rarity in Sudan, even though Sudan Railway is said to operate one of the longest railways in Africa, extending from Port Sudan via Atbara to Khartoum.
Under its 2015 pre-coup arrangements with the Al-Bashir Government, and way before that, as of 2012, multiple subsidiaries of Chinese State-owned enterprises signed a number of arrangements with the Sudanese Ministry of Roads and Bridges, seeking to modernize Sudan’s railway network. It is reported that in 2017, a bit over a year before the coup d’état, China Railway Design Corporation and China Friendship Development International Engineering Design Company signed an agreement to run a feasibility study to build a line linking Port Sudan and Chad’s N’Djamena via Khartoum. Since then, the Sudanese government was deposed and replaced by the transitional government, which will then be replaced in 2020 by a newly formed government. It remains to be seen what will become of those infrastructure arrangements post-2020, and how China will deploy the rights and remedies available to its investors under public international law to protect its investment overseas.
The views expressed in this article do not reflect the views of the authors’ respective law firms or of any organisations they are affiliated with.