Extracted from Law360
Military action in the crucial Red Sea shipping lane has ratcheted up following ongoing attacks on commercial vessels by Yemen's Houthi rebels.
The ultimate diplomatic or military resolution is unpredictable, but companies whose ships or cargo have been affected, and the countries under whose flags those ships were traveling, could take legal action against Yemen or Iran under certain international law mechanisms — even though the Houthi rebels are not currently considered representatives of the governments of Yemen or Iran.
Recent attacks by Yemen's Houthi rebels against commercial vessels transiting the Red Sea and the Bab el-Mandeb Strait have inflicted substantial losses on the owners of the ships and their cargo. Concerns over additional attacks have stymied maritime traffic through the Suez Canal, made shipping companies reroute ships via the Cape of Good Hope and further destabilized a critical corridor for global trade.
In December, several countries joined a U.S.-led multinational security force, dubbed Operation Prosperity Guardian, formed to protect commercial shipping in the region. The U.S. Navy also intervened against Houthis that were attacking a Maersk vessel, leading Iran to dispatch a warship to the Red Sea.[1]
The conflict has further escalated over the past week. On Jan. 10, the U.S. and British navies fended off the Houthis' largest-ever drone and missile attack.[2] On Jan. 15, Houthi forces hit a U.S.-owned cargo ship with a ballistic missile off the coast of Yemen.[3] The attacks against commercial vessels led the Baltic and International Maritime Council, a trade group, to warn shipping companies that they should consider avoiding operations in the area.[4]
The U.S. alleges that Iran is behind the Houthis' ongoing attacks on ships seeking safe passage through the Bab el-Mandeb Strait. Iran denies any involvement.[5] On Jan. 10, the United Nations Security Council adopted a resolution demanding that the Houthis immediately cease attacks on commercial and merchant vessels.[6]
Companies affected by the Red Sea attacks have several options for protection under international law, in addition to any potential remedies arising out of insurance agreements and other applicable contracts.
Investment Arbitration Against Yemen or Iran
Countries have concluded over 3,000 bilateral and multilateral investment agreements that grant foreign investors the right to initiate arbitration against a state if the state expropriated foreign investors' property, treated foreign investors or their property unfairly or inequitably, or failed to protect the investors and their investments from interference.[7]
A foreign company must establish that it is a qualifying investor that made a qualifying investment in the foreign state, and that acts or omissions attributable to the state damaged its investment.
Yemen is a contracting state to over 20 bilateral and multilateral investment treaties that offer protections to foreign investors.[8] A company affected by the Red Sea attacks may qualify as a foreign investor if it is incorporated in one of the states that has an investment treaty with Yemen.
Although the definition of investment differs from treaty to treaty, movable property such as a vessel may qualify as a protected investment.[9] Depending on the text of the relevant treaty, foreign companies might have to meet other requirements as well.
Before initiating arbitration, foreign investors may be required to negotiate their dispute with the host state, or litigate the underlying dispute before the host state's courts for certain periods.
Yemen's investment treaties, by and large, grant foreign investors the right to initiate an arbitration directly against a host state — in this case, Yemen — to enforce certain protections, including Yemen's obligation to protect the physical integrity of a covered investment against interference by the use of force.
This obligation is known as the full protection and security standard.[10]
Foreign investors covered by a Yemeni investment treaty could argue that Yemen breached its treaty obligations by denying their investments full protection and security and therefore must compensate the investors for their losses.
The first modern arbitration that was conducted under a bilateral investment treaty, Asian Agricultural Products Ltd. v. Republic of Sri Lanka, decided in 1990, is illustrative. Asian Agricultural Products involved a shrimp farm in Sri Lanka that was destroyed during operations by Sri Lankan security forces against a militant separatist group.
The tribunal concluded that Sri Lanka breached the full protection and security standard by failing to carry out adequate diligence — for instance, by failing to take appropriate precautionary measures that could have prevented the destruction.[11]
Other authorities have since clarified that states have a duty to employ due diligence in affording protection and security even if nonstate actors, such as the Houthi forces, cause the damage.[12]
Likewise, in the Corfu Channel case, a dispute between the U.K. and Albania that was decided by the International Court of Justice in 1949, British warships sailing through a channel within Albanian territory were damaged by the explosion of mines that had been laid by Yugoslavia. Although Albania did not lay the mines, the court held that the Albanian authorities knew about the minefield and had breached their obligation to warn ships approaching the danger zone.[13]
An analogous claim could be made in the present circumstances, in which Yemen arguably has an obligation to use its best efforts to prevent activities in its territory that it knows or ought to know could harm foreign investments.
Foreign investors covered by a Yemeni investment treaty could also argue that Yemen must provide compensation for losses resulting from armed conflict that more broadly affects investments in Yemen's territory, including its territorial waters.
For example, under the Energy Charter Treaty, Yemen is required to compensate foreign investors for losses resulting from "war or other armed conflict, state of national emergency, civil disturbance, or other similar event."[14]
Yemen also has a foreign investment law, Law No. 15 of 2010, that affords certain protections to any foreign investor involved with an investment project in Yemen.[15] That law requires fair compensation for the expropriation of foreign investment projects.
Yemeni commercial courts have jurisdiction over investment disputes, although the law also provides for arbitration of disputes involving investment projects, including under the arbitration rules and procedures of the UN Commission on International Trade Law.[16]
A potential jurisdictional hurdle for companies affected by the Red Sea attacks is showing that they invested in Yemen because investment treaties typically include a requirement that qualifying investments must have been made in the territory of the host state.
A one-off activity, such as transiting the Red Sea and the Bab el-Mandeb Strait, is unlikely to qualify as an investment in Yemen, especially given the trend for arbitral tribunals to apply the Salini test for determining the existence of a qualifying investment.
The Salini test requires that, in order to qualify, investments show (1) a contribution of money, (2) a certain duration, (3) participation in the risks of a transaction, and (4) a contribution to the economic development of the host state.[17]
Further, the application of territoriality requirements to a case involving vessels sailing in international waters could require complex factual analysis.
For example, in the December 2023 decision in Peteris Pildegovics and SIA North Star v. Kingdom of Norway, an arbitral tribunal held that a snow crab fishing enterprise's vessels did not qualify as an investment in the territory of Norway, even though some of their fishing activity took place in Norwegian waters, because the vessels were registered in and licensed by Latvia and the main locus of their harvesting was primarily on the Russian continental shelf.[18]
Nevertheless, this jurisdictional hurdle may be overcome if, for example, a company shows a nexus between its activities and Yemen. In addition, it is not clear that territorial concerns would apply equally if the investor's property is confiscated or destroyed while in Yemeni waters.
Foreign investors might also consider commencing an investment treaty arbitration against Iran. Like Yemen, Iran is a contracting state to over 50 bilateral and multilateral investment treaties that offer protections to foreign investors.[19]
Of course, Iran would counter that the attacks did not occur within its territory. However, consider the recent investor-state arbitration cases against Russia after its 2014 annexation of the Crimean Peninsula in Ukraine.
In JSC DTEK Krymenergo v. Russia, the tribunal majority held on Nov. 1, 2023, that "territory of the Russian Federation refers to the geographical area which, at the relevant date (which is the date of the impugned measures), was under the control of the Russian Federation."[20]
Similarly, if investors were able to show that Iran controlled the relevant Yemeni territory, through the Houthis, they could then argue that they made an investment in Iran and, as a result, Iran is responsible for their internationally wrongful acts.[21]
Interstate Arbitration
The international significance of the ongoing attacks may prompt certain states to espouse claims by their citizens and commence a dispute against Yemen under the UN Convention on the Law of the Sea. While the issue of state responsibility under this treaty for acts of piracy and similar violence is subject to debate, the Corfu Channel case highlights circumstances under which a state can be held responsible for actions it did not directly undertake.
With this in mind, pursuant to Article 26(1) and (2) of UN Convention on the Law of the Sea, Yemen agreed that no charge would "be levied upon foreign ships by reason only of their passage through the territorial sea" unless specific services were provided.[22]
Arguably, here, the attacks by the Houthis constitute, in effect, an unlawful de facto charge levied upon foreign ships, violating Article 26.
This argument has not yet been tested, however, and affected companies' home states would need to be willing to espouse such claims against Yemen. Based on the attacks perpetrated to date, the affected home states that could bring such claims include Japan, Israel, Germany and Belgium.
Yemen is also still a party to longstanding friendship, commerce and navigation treaties that were arguably breached because of its failure to prevent the Houthis from attacking ships in the Red Sea.
The U.S.-Yemen friendship, commerce and navigation treaty requires Yemen to treat American ships no worse than it treats other foreign ships. Although the U.S. is not a party to the UN Convention on the Law of the Sea, it might be able to claim that Yemen's de facto collection of duties on ships passing the Bab el-Mandeb Strait breached its friendship, commerce and navigation treaty with the U.S.
In summary, there are several avenues for redress under international law potentially available to foreign companies affected by Houthi attacks, and to the countries under whose flags those foreign companies were traveling.
Companies protected by one of Yemen's investment treaties could argue that, by failing to employ the requisite diligence to prevent or address the danger posed by Houthi forces, Yemen has failed to provide full protection and security or accord the similar treatment the applicable treaty requires.
Other legal instruments, such as the Energy Charter Treaty and Yemen's foreign investment law, also offer protections for foreign investors in circumstances of armed conflict or the expropriation of investment projects.
Beyond these potential avenues for direct recourse by foreign investors, certain states might decide to espouse their nationals' claims against Yemen by invoking the UN Convention on the Law of the Sea or a friendship, commerce and navigation treaty.
[1] Lee Ying Shan, Spencer Kimball, "Oil prices fall as traders monitor rising tensions in Red Sea" (Jan. 2, 2024), CNBC, available at https://www.cnbc.com/2024/01/02/oil-prices-rise-as-iranian-warship-enters-red-sea-.html.
[2] Jon Gambrell, "Yemen's Houthis launch their largest Red Sea drone and missile attack, though no damage is reported" (Jan. 10, 2024), Associated Press, available at https://apnews.com/article/yemen-houthi-rebels-red-sea-attacks-israel-f820b848eb76fa3ecc8056ca332cabae.
[3] Lipika Pelham, "Houthi missile hits US-owned container ship in Gulf of Aden" (Jan. 15, 2024), BBC, available at https://www.bbc.com/news/world-middle-east-67986226.
[4] Alex Longley, "US Merchant Vessel Struck as Shippers Told to Avoid Red Sea" (Jan. 15, 2024), Bloomberg, available at https://www.bloomberg.com/news/articles/2024-01-15/us-advises-bab-el-mandeb-still-too-risky-for-ships-trade-group.
[5] Sam Dagher and Arsalan Shahla, "Iran Sends Warship to Red Sea After US Sinks Houthi Boats" (Jan. 1, 2024), Bloomberg, available at https://www.bloomberg.com/news/articles/2024-01-01/iran-dispatches-warship-to-red-sea-after-us-sinks-houthi-boats.
[6] United Nations Security Council, SC/15561, "Adopting Resolution 2722 (2024) Security Council Demands Houthis Immediately Stop Attacks on Merchant, Commercial Vessels in Red Sea" (Jan. 10, 2024), available at https://press.un.org/en/2024/sc15561.doc.htm.
[7] UNCTAD, Investment Policy Hub, available at https://investmentpolicy.unctad.org/international-investment-agreements.
[8] UNCTAD, Investment Policy Hub, Yemen, available at https://investmentpolicy.unctad.org/international-investment-agreements/countries/231/yemen.
[9] See, e.g., Agreement between the Government of Malaysia and the Government of the republic of Yemen for the Promotion and Protection of Investments (Feb. 11, 1998), Article 1 ("For the purpose of this Agreement: (a)'investments' means every kind of asset and in particular, though not exclusively, includes: (i) movable and immovable property and any other property rights such as mortgages, liens or pledges[.]").
[10] See, e.g., Agreement between the Government of Malaysia and the Government of the republic of Yemen for the Promotion and Protection of Investments (Feb. 11, 1998), Article 2 ("Investments of investors of each Contracting Party shall at all times be accorded equitable treatment and shall enjoy full and adequate protection and security in the territory of the other Contracting Party."); Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Yemen Arab Republic (Mar. 18, 1985), Article 3(2) ("More particularly, each Contracting Party shall accord to such investments full security and protection which in any case shall not be less than that accorded either to investments of its own nationals or to investments of nationals of any third State, whichever is more favorable to the investor.").
[11] Asian Agricultural Products LTD (AAPL) v. Republic of Sri Lanka , ICSID Case No. ARB/87/3, Final Award, 27 June 1990, ¶ 85.
[12] See, e.g., Antaris Solar GmbH and Dr. Michael Göde v. Czech Republic , PCA Case No. 2014-01, Award, 2 May 2018, ¶ 362 (collecting cases).
[13] Corfu Channel case, Judgment of April 9th, 1949: I.C. J. Reports 1949, P. 4, 22-23.
[14] ECT, Article 13. See also Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Yemen Arab Republic (Mar. 18, 1985), Article 7 ("Nationals of the Contracting Party who suffer losses in respect of their investments in the territory of the other Contracting Party owing to war or other armed conflict, revolution, a State of national emergency, revolt, insurrection or riot shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favorable than that which that Contracting Party accords to its own nationals or to nationals of any third State, whichever is more favorable to the nationals concerned.").
[15] Law No. (15) for the year 2010 Concerning Investment, available at https://www.wto.org/english/thewto_e/acc_e/yem_e/wtaccyem34a1_leg_1.pdf.
[16] Law No. (15) for the year 2010 Concerning Investment, Article 26, available at https://www.wto.org/english/thewto_e/acc_e/yem_e/wtaccyem34a1_leg_1.pdf.
[17] Salini Construttori S.p.A., et al. v. Kingdom of Morocco , ICSID Case No. ARB/00/4, Decision on Jurisdiction (July 16, 2001), ¶ 52.
[18] Peteris Pildegovics and SIA North Star v. Kingdom of Norway , ICSID Case No. ARB/20/11, Award (Dec. 22, 2023), ¶¶ 270-272.
[19] UNCTAD, Investment Policy Hub, Iran, available at https://investmentpolicy.unctad.org/international-investment-agreements/countries/98/iran-islamic-republic-of.
[20] JSC DTEK Krymenergo v. Russia , PCA Case No. 2018-41, Award (Nov. 1, 2023), ¶ 292.
[21] Articles on Responsibility of States for Internationally Wrongful Acts, Yearbook of the International Law Commission, 2001, vol. II.
[22] United Nations Treaty Collection, Convention on the Law of the Sea, Signatories, available at https://treaties.un.org/Pages/ViewDetailsIII.aspx?src=TREATY&mtdsg_no=XXI-6&chapter=21&Temp=mtdsg3&clang=_en.