Module_3 (Pubic International Law)

MODULE-3

STATE RESPONSIBILITY

3.1 INTRODUCTION

Since it is the states who are parties of international law, and it is the states which are bound by
such laws, state responsibility is a fundamental principle of international law. In essence, when
one state commits an internationally unlawful act against another state, international
responsibility is established between the two. The breach of an international obligation gives rise
to the need for reparation, which shall be delved upon ahead in this module. Initially, the focus
was determined on principles which are procedural in nature and other consequences that flow
from the breach of a substantive rule of international law. This has led to a number of issues
concerning the relationship between the rules of state responsibility and those relating to other
areas of international law. A famous case with reference to the relationship between the rules of
state responsibility and that of the law of treaties is that of the Rainbow Warrior Arbitration
between France and New Zealand in 1990.1

The incident took place in 1985, when the French agents destroyed the vessel Rainbow Warrior
in harbor in New Zealand. The United Nations General Secretary back then, Javier Perez de
Cuellar, was asked to mediate the issue. He gave a ruling in 1986 inter alia asking the French to
compensate New Zealand and for the transference of two French agents to a French Base in the
Pacific, where they were commanded to stay for 3 years and not to leave unless consent was
given by both the states.2 The issue arose when both the French agents were repatriated to
France, without the consent of New Zealand, before the expiry of the 3 years. Since the
Agreement of 1986 contained an arbitration clause, New Zealand had some resort to gain justice.
The clause was invoked by New Zealand, whose argument was centered upon the breach of a
treaty obligation. France, on the other hand, argued that only the law of state responsibility was
relevant and the concepts of distress and force majeure exonerated it from liability.

1 Oppenheim's International Law (eds. R. Y. rennings and A. D. Watts), 9th edn, London, 1992, chapter 4
2 the Agreement between France and New Zealand of 9 July 1986, 74 ILR, p. 274

The arbitral tribunal decided that the law relating to treaties was relevant, but that the legal
consequences of a breach of a treaty, including the determination of the circumstances that may
exclude wrongfulness (and render the breach only apparent) and the appropriate remedies for
breach, are subjects that belong to the customary law of state responsibility.3

It was then observed that international law did not distinguish between contractual and tortuous
responsibility, so that violation by a state of any obligation whatsoever gives way to the state
responsibility and, eventually, duty of reparation.

When asked a question as to whether any amounts due in respect of war damage might affect the
distribution of assets and debts in the succession process affecting the successor states of the
Former Yugoslavia, the Arbitration Commission of Yugoslavia was faced with the question of
the relationship between state responsibility and other branches of international law. Addressing
such question in Opinion No. 13, they answered in negative and emphasized that the question of
war damage was one that came within the sphere of state responsibility, while the laws relating
to state succession fell under a separate area of international law. Accordingly, the two issues
must be decided separately.

The International Law Commission has been attempting to bring forth resolutions with regard to
state responsibility. In 1975, it took a decision for the draft articles on state responsibility to be
divided into three parts: part I to deal with the origin of international responsibility, part II to deal
with the content, forms and degrees of international responsibility and part III to deal with the
settlement of disputes and the implementation of international responsibility4. Part I was
provisionally adopted by the Commission in 19805 and the Draft Articles were finally adopted on
9 August 20016. General Assembly resolution 56/83 of 12 December 2001 took note of the
adopted articles and commended them to governments.

3 82 ILR, pp. 499, 551
4 Yearbook ofthe ILC, 1975, vol. 11, pp. 55-9.
5 Yearbook of the ILC, 1980, vol. 11, part 2, pp. 30 ff.
6 ILC Commentary 2001, A/56/10,2001.

3.2 NATURE OF STATE RESPONSIBILITY

The crucial factors of state responsibility primarily lean upon several factors:

1) The existence of a legal obligation between two or more states
2) An act or omission thereof which violates that obligation in force
3) The loss/ damage caused has arisen due to such violation of the obligation
4) Such loss is imputable to the state responsible
5) The loss has resulted from the act or omission thereof

Several cases have been documented to show the requirements above are essential. The Chorzow
Factory case7 was one such, in which the Permanent International Court of Justice held that:
“It is a principle of international law, and even a greater conception of law, that any breach of
an engagement involves an obligation to make reparation.”

The Spanish Zone of Morocco claims8 had Judge Huber stating that:
“Responsibility is the necessary corollary of a right. All rights of an international character
involve international responsibility. Responsibility results in the duty to make reparation if the
obligation in question is not met.”

Article 1 of the International Law Commission's Articles on State Responsibility reiterates the
general rule, widely supported by practice, that every internationally wrongful act of a state
entails responsibility.

Article 2 provides that there is an internationally wrongful act of a state when conduct consisting
of an action or omission is attributable to the state under international law and constitutes a
breach of an international obligation of the state.9 This principle has been affirmed in the various
cases.

7 PCIJ, Series A, No. 17, 1928, p. 29; 4 AD, p. 258
8 2 RIAA, p. 615 (1923); 2 AD, p. 157
9 Yearbook of the ILC, 1976, vol. 11, pp. 75 ff

Article 3 stipulates that the municipal laws are disregarded when the question of what constitutes
an internationally unlawful act is raised, and only international law is taken into consideration.10

Article 12 stipulates that there is a breach of an international obligation11 when an act of that
state is not in conformity with what is required of it by that obligation, regardless of its origin or
character.12

A breach that is of a continuing nature extends over the entire period during which the act
continues and remains not in conformity with the international obligation in question,13 while a
breach that consists of a composite act will also extend over the entire period during which the
act or omission continues and remains not in conformity with the international obligation.

If a state assisted another state in such wrongful act, with the knowledge of the circumstances
and that if such act is committed, it would constitute to be an internationally wrongful act, would
also be held responsible, as per Article 16.

3.2.1 The question of fault

The question to be asked next is whether the responsibility of the state for wrongful acts or
omissions thereof are to applied in a strict manner, or whether one must show some fault or
intention on part of the officials concerned. There are conflicting theories for the same. The risk
theory, which revolves around the principle of objective responsibility, which maintains that, a
strict liability should be maintained when it comes to the State. Once an unlawful act committed
by an agent of the state has occurred, which causes an injury, the faulting state shall be held
responsible for the act to the state suffering the damage irrespective of good or bad faith. The
contrasting theory, i.e. the fault theory revolves around the concept of subjective responsibility,
which emphasizes that an element of intentional (dolus) or negligent (culpu) conduct on the part
of the person concerned is necessary before his state can be rendered liable for any injury caused.
Even though academicians and judges are divided on this opinion, majority tend to favor the
principle of strict liability.

10 Yearbook of the ILC, 1979, vol. 11, pp. 90 ff
11 Article 13 and ILC Commentary 2001,p. 133.
12 ILC Commentary 2001, p. 124
13 Article 14, 12OILR, p. 10.

An example of the principle of objective responsibility would be that of the Neer claim14 in
1926, where an American superintendent of the Mexican mines was shot. The USA, on behalf of
his widow and daughter, claimed damages because of the lackadaisical manner in which the
Mexican authorities pursued their investigations. The General Claims Commission dealing with
the matter disallowed the claim, in applying the objective test.

A leading case that supported the subjective responsibility theory was that of the Home
Missionary Society claim15 in 1920 between Britain and the United States. In this case, the
imposition of a 'hut tax' in the protectorate of Sierra Leone triggered off a local uprising in which
Society property was damaged and missionaries killed. The tribunal dismissed the claim of the
Society (presented by the US) and noted that it was established in international law that no
government was responsible for the acts of rebels where it itself was guilty of no breach of good
faith or negligence in suppressing the revolt. It should, therefore, be noted that the view
expressed in this case is concerned with a specific area of the law, viz. the question of state
responsibility for the acts of rebels. Whether one can create analogies from this generally is open
to doubt.

3.2.2 Imputability

Imposing the absolute liability upon the state whenever a state official has committed an act
which is questionable increases the tendency of a state to exercise greater control and regulate
the actions of its representatives. It also aids in states following compliance of the norms of
behavior of international relations. State responsibility encompasses various areas, including
breach of treaty, breach of a convention, the violation of the territory of another state, or damage
to state property. The state may also incur responsibility with regard to activities done by their
officials which result in hurting a national of another state, despite no authorization being given
on behalf of the state.

The doctrine is based out of the relationship or the link that can be established between the state
and the person(s) committing such act. The state, being an abstract and artificial legal entity,
cannot by itself commit any act. It requires the people of the state as its authorized agents to do

14 4 RIAA, p. 60 (1926)
15 6 RIAA, p. 42 (1920); 1 AD, p. 173.

so. Since it is not pragmatic for the state to be held responsible for every single national
belonging to that state, it has been established that the state is only responsible for acts of its
servants that are imputable or attributable to it, which is why it becomes necessary to examine
the concept of imputability (also termed attribution). Imputability is the legal fiction which
assimilates the actions or omissions of state officials to the state itself and which renders the state
liable for damage resulting to the property or person of an alien. Article 4 of the ILC Articles
speaks on similar lines.

3.2.3 Ultra vires Act

There have been many cases in which the state has been held responsible even for the acts that it
had not authorized, or had exceeded the legal capacity of the officials involved. In Youman's
claim16, militia ordered to protect threatened American citizens in a Mexican town instead joined
the riot, during which the Americans were killed. These unlawful acts by the militia were
imputed to the state of Mexico, which was found responsible by the General Claims
Commission.

The conduct of an organ or of a person or entity empowered to exercise elements of
governmental authority shall be considered an act of the state under international law if acting in
that capacity, even if it exceeds its authority or contravenes instructions (as per Article 7).

3.3 STATE CONTROL AND RESPONSIBILITY

Article 8 of the ILC Articles provides that the conduct of a person or group of persons shall be
considered as an act of state under international law if the person or group of persons is in fact
acting on the instructions of, or under the direction or control of, that state in carrying out the
conduct. While the first half of the article seems to be accepted by all, the second half has created
quite a stir in the international community. The problem lies in the attempt to define the
necessary direction and control required for the second half. The Commentary to the article
emphasizes that, 'Such conduct will be attributable to the state only if it directed or controlled the

16 4 RIAA, p. 110 (1926); 3 AD, p. 223

specific operation and the conduct complained of was an integral part of the operation.'17 In the
case of Nicaragua vs. United States of America18, the International Court of Justice held that in
order for the conduct of the guerrillas to have been attributable to the US, who financed and
equipped the force, “it would in principle have to be proved that that state had effective control
of the military or paramilitary operation in the course of which the alleged violations were
committed.”19 In other words, general overall control would have been insufficient to ground
responsibility.

3.4 INVOCATION OF STATE RESPONSIBILITY

Article 42 of the ILC Articles stipulates that a state is entitled as an injured state to invoke the
responsibility of another state if the obligation breached is owed to that state individually or to a
group of states, including that state or the international community as a whole, and the breach of
the obligation specially affects that state or is of such a character as radically to change the
position of all the other states to which the obligation is owed with respect to the further
performance of the obligation.20 Cases where several states are injured by the same wrongful act
committed by one state, they may separately invoke responsibility.

3.5 CONSEQUENCES OF INTERNATIONALLY WRONGFUL ACTS

Actions have consequences. In this particular case, there are two types of consequences:

1) Cessation: - The state responsible for such acts shall be under such obligation to cease
doing such act, and if it continues to do so, to offer appropriate assurances and guarantees
of non-repetition of such act to the states injured.

2) Reparation: - The principle enshrined here was laid down in Factory at Chorzow,
Germany vs. Poland21, where the PCIJ held that The principle behind this being a
consequence is that reparation must, as far as possible, wipe out all the consequences of

17 ILC Commentary 2001, p. 104.
18 (1986) ICJ Rep 14
19 ICJ Reports, 1986, pp 14, 64-5
20 ILC Commentary 2001, p. 294.
21 1927 P.C.I.J. (Ser. A) No. 9

the illegal act in the first place and restore the situation as it would have been, in all
probability, had such an incident not occurred.

3.6 TREATMENT OF FOREIGN NATIONALS

The issue of treatment of foreign nationals is one of the most hotly debated issues of
international law. The developed and developing countries have different approaches while
dealing with this issue. Most of the developing countries believe that certain privileges have been
granted to capitalist countries by international law. Hence, they seek to reduce those privileges.
The developing countries stress upon their sovereignty and independence & view the economic
influence of the developed countries in a negative light. The developed countries, on the other
hand, seek to protect their investments abroad by providing for security. Due to an increase in
trading activities, number of foreign nationals abroad increased drastically. As a result of this,
diplomatic protection of foreign nationals increased. Many treaties were entered into for the
settlement of claims of foreign nationals. By entering into such treaties, national and
international claims procedures coupled with diplomatic protection helped foreign nationals in
times of loss or injury due to state responsibility.

3.6.1 STANDARD OF TREATMENT TO BE METED OUT TO FOREIGN NATIONALS
According to developed countries, since older times, there has been a minimum standard of
protection that has been provided to foreign nationals regardless of the manner in which the state
treated its own nationals. Other countries have supported the national treatment standard. The
national treatment standard holds that foreign nationals are to be treated by the state in a similar
manner that the latter would treat its own nationals. The national treatment standard developed as
a result of hostility towards the economic domination of the developed countries as opposed to
any adherence to basic standards of economic justice. Particularly, the South American countries
felt that the earlier minimum standard of protection was being used as a means of interference in
the domestic affairs of the host country. As a result, they came up with the Calvo doctrine. The
Calvo doctrine involved the principle of non-intervention along with the condition that foreign
nationals were entitled only to those rights that were available to nationals, and thus had to seek
redressal only at the domestic level. This was to be used as a shield against outside interference.

It is evident that a high threshold was prescribed for the minimum standard rule to be made
applicable. It was also debated that the concept was more about a process of decision instead of a
definite standard as claimed by the developed countries. The process of decision, as per this
debate, involves a close scrutiny of the state’s responsibility in case of an injury to a foreign
national. It is also debated that the contents of the standard rule are to be seen only in case of
denial of justice. In simpler words, improper administration of justice towards a foreign national
is what brings the test into force.

Some scholars argued that the two approaches combined through the recognition of basic rights
of man in the international arena. There were two principles which were enunciated; firstly, that
the foreign nationals had to have the same rights as that of nationals, which must have a
threshold of the recognised fundamental human rights, secondly, international state responsibility
would only set in after human rights of the foreign national were affected. Tough these were not
implemented at that time, it is noticeable that human rights law has evolved a lot over the last
few years. In fact, the UN Declaration on Human Rights of Individuals who are Not Nationals of
the Country in which they Live deals with the rights of foreign nationals. It is unavoidable,
though, that some rights that are available to nationals will not be available to foreign nationals.
The latter cannot have political rights can may be prohibited from seeking employment in certain
areas. However, foreign nationals can be expelled from the country only on very rare
circumstances and the method used for the same should be least harmful to the foreign national
in question.

Even though this position is unclear in international law, some of the treaties and conventions do
provide for it. For e.g., the International Covenant on Civil and Political Rights mentions that
foreigners can be expelled only in accordance with law, except in cases of national security
where the foreigner is given the right to representation and review. Also, the European
Convention on Establishment, 1956 talks about expulsion only in cases of national security
endangerment or for public order or morality. The Fourth Protocol of the European Convention
on Human Rights prohibited the collective expulsion of refugees.22 However, the burden is upon
the claimant to prove that the expelling country’s action was wrong. The other case where such
rules are applicable is when the wrongful actions of the state have compelled the foreign national

22 Article 1, Protocol 7, European Convention on Human Rights.

to leave to the impossibility of the latter’s continued stay. International law requires that
whenever foreign nationals are expelled, their national state needs to accept them back.

3.7 EXPROPRIATION OF FOREIGN PROPERTY

Since the 19th century, the developed countries expanded their economies leading to investments
in the less developed countries. As a result of this, large parts of these local economies ended up
under the ownership & control of the developed countries. With the granting of independence to
these countries, these properties amassed by the developed countries started coming under
pressure. While dealing with the laws relating to expropriation of the property of foreign
nationals, there appear to be two opposing objectives. On one side, the developed countries or
the capital exporting countries need some amount of security & protection for their investments.
On the other hand, the developing countries are apprehensive regarding the power of the foreign
investment and the drain to the former’s economy that such an inflow of capital causes. As a
result of this apprehension, more often than not, the developing countries tend to attempt taking
over the control of these enterprises. In a lot of countries these days, nationalisation of properties
and industries has become a common phenomenon. It is believed by these countries that
acquisition of such private property is an essential requirement for committing towards socio-
economic reforms.

A question arises that if nationalisation is such a legitimate means adopted by a country, then
why is it so controversial wherever foreign property is involved? If a particular country is
engaging in nationalisation, a refusal to expropriate foreign property is akin to providing a
privileged status to the latter. This effectively also undermines the power of a country in its
jurisdiction. It is an undisputed fact that expropriation of foreign property is legitimate and
acceptable. However, for such an expropriation to take place, there are certain conditions which
need to be fulfilled.

Another question arises as to when should international law be made applicable during such a
scenario. The general rules that are applicable while dealing with foreign nationals are relevant
here. This issue arises when there is a contract between a foreign private enterprise and a
country. Multiple possibilities exist while dealing with such a contract. Some would like to argue
that this contract becomes ‘international’ by its very nature while it is being inked. Due to this

nature, the proponents of this theory claim that this contract should be placed under the aegis of
international law, instead of the contracting state’s law. By this, it is argued that ‘Pacta Sunt
Servanda’ is applicable. This means that, with the operation of the principles of international
law, the agreements ought to be honoured by the contracting state. This would, thus, place some
constraints upon the power of the contracting state to make alterations to the agreement in a
unilateral manner.

In this manner, it becomes clear that international law is applicable in those cases where the
expropriation is being conducted in an unlawful manner, or a discriminatory manner without
offering proper compensation or refusing to offer any compensation.

3.7.1. PROPERTY FOR THE PURPOSES OF INTERNATIONAL LAW

It is understood that property includes any physical objects as well as intangible entities such as
companies’ shares, debts and intellectual property. One other important definition was provided
by the 1961 Harvard Draft Convention on the International Responsibility of States for Injuries
to Aliens. It defined property as “all movable and immovable property, whether tangible or
intangible, including industrial, literary and artistic property as well as rights and interests in
property”. It was held in subsequent case laws that property also included concession rights as
incorporeal property. In fact, contractual rights play an important role in determining what
property is, in a particular instance.

3.7.2. EXPROPRIATION’S NATURE

Even though it is generally agreed that expropriation is the taking of property by a country, other
actions that fall short of direct possession of assets can also be included under expropriation. The
1961 Harvard Draft includes, “any such unreasonable interference with the use, enjoyment or
disposal of property as to justify an interference that the owner thereof will not be able to use,
enjoy or dispose of the property within a reasonable period of time since the inception of such
interference”.

3.7.2.1.ROLE OF THE DIVIDING LINE
In case of materialisation of risks to the business, it cannot be said to be expropriation. However,
the taking over of the controlling stock interests of a foreign corporation is akin to taking over
the control of the assets and profits of the above corporation. Hence, this would definitely

constitute expropriation. Indirect expropriation is also possible. There are some instances where
the taking over of a corporation is actually a process instead of one single act. This gives rise to
complications wherein it becomes difficult to determine as to when the process has touched the
point of expropriation. This is usually important for the purpose of valuation of compensation.
Another example of indirect expropriation is when closely connected ancillary rights of the
foreign corporation are taken over by the state. For example, the ancillary rights would include
contracts and certain patents which have not been nationalised directly by the state in question.

3.7.3. THE INTERPRETATION OF PUBLIC PURPOSES
It is generally understood that expropriation is to be conducted for public purposes. In fact, it was
held in the case of Certain German Interests In Polish Upper Silesia that expropriation must be
conducted only for “reasons of public utility, judicial liquidation and similar measures”. This is
also applicable to wartime as well. It was subsequently held that expropriation on purely political
grounds was arbitrary and discriminatory in nature. In later cases, it was also held that the
abovementioned public utility is not a mandatory requirement to test the legality of
nationalisation. This has led to confusion as some charters mention this requirement, while the
others do not do so. This has not been answered in definite terms, though recent practice makes it
clear that as long as the measures taken are non-discriminatory in nature, public good is an
acceptable ground for expropriation. This kind of expropriation would not be unlawful in nature.
Even environmental reasons constitute a public purpose. Thus, it is clear that public purpose, if
not discriminatory in nature, is an acceptable ground for expropriation.

3.7.4. THE QUESTION OF COMPENSATION
It is required that during expropriation, the compensation granted must be immediate, sufficient
and effective. A lot of bilateral investment treaties mention this. The abovementioned standard
for compensation is known as the Hull formula. As per World Bank Guidelines for the treatment
of Foreign Direct Investment, expropriation of private foreign investment is permissible only if
the expropriation is done on the basis of good faith, for a public purpose, without any form of
discrimination on any basis, and lastly but importantly, only after appropriate compensation is
provided. The European Energy Charter Treaty make sit clear that the compensation provided
must be prompt, adequate and effective. In this manner, the latter has accepted the Hull formula
for the granting of compensation.

For assessing the quantum of compensation to be granted, some categories must be considered.
There usually is no dispute regarding the tangible (physical) assets of the corporation. Even
though different countries follow different methods of evaluation, the fair market value is widely
accepted as the standard for determining the value of the assets. Compound interest on the value
is also provided as compensation. The disputed area is regarding compensation for the loss of
future profits. From various case laws, it is clear that remote damages will not be considered,
while only direct and foreseeable damages will be granted for the same. It was held that
profitable going concerns are given their value based on a discounted cash flow basis. In case the
entity has not operated for a long enough time in order to understand its performance record, the
investment made by the foreign entity is instead referred to while determining the fair market
value. For any of these conditions to be made applicable, the lawfulness or the unlawfulness of
the expropriation needs to be confirmed. In case the large-scale expropriations are lawful, it is
clear that all the circumstances are considered and the fair market value of the property is
discounted.

There is a clear difference between lawful and unlawful expropriations. The compensation
granted to the foreign investor depends upon the type of expropriation. In case of an unlawful
expropriation, the monetary equivalent or total restitution is mandated so that the situation which
may have existed had such an expropriation not have taken place. In case of lawful
expropriation, full payment of the value of the undertaking is provided. However, countries such
as the US have rejected the “discounted cash flow” method as it was too speculative in nature as
well as amounting to restitution as well. These countries felt that compensation for the lost
profits should be applicable only in cases where unlawful expropriation was the issue.

3.7.5. THE ROLE OF BILATERAL INVESTMENT TREATIES
Bilateral investment treaties cover most of the commercial situations between private parties and
countries. These agreements were entered into so that investment was encouraged while
achieving a balance between both the capital-exporting and capital importing countries. The
number of bilateral investment treaties have increased exponentially. These agreements are
designed in such a manner so that they set the relevant standards of international law. Their
structure is uniform in nature and play an important role in the setting up of sate practice.

The common features of these bilateral investment treaties are as follows;

➢ Investment, in these bilateral investment treaties, is broadly defined.
➢ It is usually undertaken by the parties to the treaty that they will create favourable

conditions for investment, provide “fair and equitable treatment” to the said investments,
avoid discriminatory practices that will cause impediments to the investment in its
territory.
➢ At the minimum, the investments will be treated on par with the investments of other
states. Their treatment will not be less favourable to the investments of the latter.

3.8. ROLE OF LUMP-SUM AGREEMENTS FOR THE SETTLEMENT OF CLAIMS

Expropriation disputes regarding foreign property have been resolved through lump-sum
agreements. These agreements are concluded after long drawn out negotiations, and the
evaluation of assets usually ends up at below the assets’ current value. In these types of
agreements, it is the respective government which is responsible for the claims settlement of its
nationals. It is questioned whether these agreements come under state practice under customary
international rules or not. The compensation to be provided upon expropriation of foreign
property is what is called into question. These agreements were questioned because, more often
than not, they took non-juridical considerations into mind. While these agreements have been
accepted, it needs to be noted that they deal with specific instances as opposed to providing a
general template for the future. So, caution needs to be followed while considering the
circumstances of the principle and its practice.

3.8.1. THE REQUIREMENT OF NON-DISCRIMINATION
As mentioned earlier, while considering expropriation, the principle of non-discrimination needs
to be strictly followed for the former to be considered lawful and valid. It has not been
mentioned in the resolutions passed but, through case laws, the principle of non-discrimination
has been accepted as an important pre-requisite for a valid expropriation. Regardless of its
relevance, the principle of non-discrimination is a tricky factor while determining expropriation.
In practice, it is one of the most difficult factors to prove in a concrete manner.

3.8.2. THE ROLE OF THE MULTILATERAL INVESTMENT GUARANTEE AGENCY

The Convention Establishing the Multilateral Investment Guarantee Agency, 1985 has provided
an approach for the balancing of the competing interests in regard to foreign investment. It
established the Multilateral Investment Guarantee Agency in 1988. The role of this agency is to
provide political risk insurance (guarantees) to the lenders and investors. All the members of the
World bank are eligible to become members of the Multilateral Investment Guarantee Agency.
The agency is an affiliate of the World Bank. Its purpose is to “encourage the flow of investment
for productive purposes among member countries and, in particular, to developing countries”23
By giving an insurance cover against “non-commercial risks”, the agency seeks to achieve its
purpose. Non-commercial risks include currency transfer restrictions, expropriation measures,
occurrence of state contract breaches, and losses caused due to war or civil disturbances.
Through research and circulation of information regarding investment opportunities, it is
expected that the Multilateral Investment Guarantee Agency would be able to encourage
investment. It is also hoped that the sensitivity around expropriation will eventually reduce
through the initiative of this agency.

23 Article 2, Convention Establishing the Multilateral Investment Guarantee Agency, 1985.