Explained: Barcelona Traction Case

Barcelona Traction Case

Keywords: Belgian, Spain, jurisdiction, shareholder, compensation

Facts:

In 1911, the “Barcelona Traction, Light and Power Company, Limited” was incorporated in Canada. It has its head office in Toronto. It established its various subsidiary companies in Spain for developing an “electric power production and distribution system” in Catalonia. Some of these subsidiary companies had their registered offices in Canada while some had the same it in Spain.

In 1936, the servicing of the Barcelona traction bonds, issued principally in Sterling was suspended by the Spanish government due to the civil war in Spain. After the war ended, foreign currency was needed to restart the servicing of the sterling bonds. However, the Spanish exchange control authorities denied from authorizing the transfer of the needed currency.

The Belgian Government reported this incident to the Spanish Government. The Spanish Government stated that for the authorization of the transfer could be done only when “it was shown that the foreign currency was to be used to repay debts arising from the genuine importation of foreign capital into Spain”. This was not established so the authorization of the transfer was not made.

Then, on 12 February 1948, judging the petition filed by of three Spanish holders of Barcelona Traction sterling bonds, the Court of Reus declared the company bankrupt. After this judgment, Spanish directors were appointed in the two subsidiary companies. Shortly after this, other subsidiary companies were also brought under the ambit of these measures.

In 1958, the Belgian Government filed an Application against the Spanish Government. However, in 1961, Belgian government decided to discontinue the proceedings.  It was decided that negotiations will be held between the representatives of the concerning private interests. However, the negotiations could not success. Therefore, on 19 June, 1962, the Belgian Government filed a fresh application in the Court. In the application, it claimed compensation for the Belgian shareholders of the company losses who suffered losses because of the acts of the Spanish State which were violative of the international law.

Preliminary objections:

It was contended by the Spain that the claims of Belgium are not admissible. Spain raised primarily four objections before the Court.

The first two preliminary objections stated that the Court lacks the jurisdiction to hear the presented case. As Belgium discontinued the earlier proceeding, it is barred now to institute a new proceeding.

The third objection was that the Belgian government did not have the “jus standi”. The fourth objection stated that all the local remedies available in Spain were not used. Both these objections were joined to merit.

Issues:

The Court mainly dealt with one issue i.e. “Can a State extend diplomatic protection to its nationals who are shareholders in a company which is incorporated in another State if the interests of the shareholders are affected due to a wrong committed against the company?”

First preliminary objection:

The Spanish government supported its first preliminary contention that Belgium government cannot institute the present proceedings because it had discontinued the earlier proceedings in 1961 on the basis of five arguments. They are-

• The act of discontinuing the initial proceedings was a “purely procedural act”.  
• Discontinuance of proceedings itself shows that no further action will be taken on that issue except when the party expressly reserves the right to start new proceedings.
• When an effort was made by the representatives of the Belgian interests to negotiate again with the representatives of the Spanish interests, they got refusal from the later side. Further, an understanding was there between both sides that the discontinuance of the application would lead to final abolition of the claim. The applicant denied this contention stating that their intention as just to terminate that proceeding and nothing else.
• The respondent was misled by the applicant about the import of the discontinuance. Because of this, the Respondent decided to negotiate and resultantly suffered prejudice.
• The initiation of proceedings was not as per the spirit and economy of the “Hispanic-Belgian Treaty of July 19, 1927”. As per this treaty, before submitting a dispute for adjudication, one should go through all the possible preliminary stages. In the initial proceeding which was discontinued, all these stages ere gone through. However, the same were repeated in connection with the present proceeding. This could not have been the intention of the Treaty. Therefore, the new proceedings are out of order.

The Court was of the opinion that the first and the second contentions are contradictory to each other. Therefore, the Court rejected both the arguments. Further, relating to third argument, it observed that the exchanges, upon which the Respondent is relying, took place almost totally between the concerned representatives of the private interests. For binding the governments on either side, it must be shown that the representatives acted in such a way as to bind their governments. The respondent failed to prove this a due to which the Court rejected this argument as well. Talking about the fourth argument, the Court stated that the Respondents did not face any lose by agreeing to the negotiations. Therefore, the fourth contention cannot be accepted. Rejecting the last argument, the Court observed that one cannot say that all the treaty processes are exhausted until there exists a right to initiate new proceedings or the case has been prosecuted to judgment. On the basis of all these observations, the Court rejected the First Preliminary Objection of the respondent.

Second preliminary objection:

For establishing the jurisdiction of the Court, the Applicant relied on Article 37[i] of the Statute of the Court and Article 17[ii] of the Hispanic-Belgian Treaty of Conciliation, Judicial Settlement and Arbitration (1927). It was contended by the applicant that the treaty of 1927 is still in force and both sides are parties to the Statute of ICJ.

The Respondent contended that although the 1927 Treaty is still in force, Article 17(4) has lapsed on the dissolution of the PCIJ in 1946. Along with this, Article 37 is only applicable to the States who were parties of the Statute before PCIJ was dissolved. However, Spain was admitted to the UN in 1955 i.e. after dissolution of PCIJ.

The Court observed that the intention of the drafters of Article 37 was to preserve maximum jurisdictional clauses from becoming inoperative due to dissolution of the PCIJ in prospective manner.

Mainly, three conditions are mentioned in Article 37 which includes:

1. “There should be a Treaty or Convention in force
2. It should provide for the reference of a matter to the PCIJ
3. The dispute should be between the States both or all of which are parties to the Statute”.

All three conditions are fulfilling in the present case; therefore, referring the matter to the International Court of Justice is possible. Based on these observations, the Court also rejected the Second Preliminary Objection.

Third and fourth preliminary objection:

The court had joined both these objections to the merits. While dealing with the question of “jus standi”, it was observed by the Court that a State is obliged to cover under the protection of law the “foreign investments and foreign nationals” that had been admitted to its territory. However, this obligation is not absolute in nature. If the State breaches this obligation, it must have a proper reason for doing so. If any question arises relating to an unlawful act committed against a company representing foreign capital, the national State of that company is only authorized under the general rule of international law to exercise diplomatic protection for seeking redress. However, there are some special circumstances in which the general rule may not apply. They are-

• The case of a company which does not exist now
• The case of the protecting State of the company which lacks the capacity of taking action.

The Court observed that although all the assets of Barcelona Traction are lost, the company’s corporate entity is still in existence. While taking about the second case, there is no dispute in the fact that the company if of Canadian nationality.

The company has been protected by the Canadian government for many years. If Canadian government has stopped to act on behalf of the company, it is not a justification for any other government to exercise diplomatic protection.

Judgment:

After taking into consideration various documentaries and other evidences submitted by both the sides, the Court rejected the claim of the Belgium government by 15 votes to 1. The Court stated that “the possession by the Belgian Government of a right of protection was a prerequisite for the examination of such problems”. The court observed that if they would adopt “the theory of diplomatic protection of the shareholders”, it would lead to numerous claims from different States which will pave a way to an insecure atmosphere in the arena of international economic relations. Therefore, the Court concluded that the Belgium government did not have the “jus standi” in this case. Due to this, the Court was of the opinion that there is no reason to examine remaining aspects of the case and pronounce decision on the same. 12 votes of the majority were based on this reasoning only.

Conclusion:

The decision of the Court to dismiss this case effectively shows the differences between “states and individuals”. It further demonstrates who is considered sovereign in the international arena. The decision of the Court was in favour of Spain as Belgium did not have jurisdiction to file an application and the shareholders who were seeking compensation were not given diplomatic immunity. Therefore, it is not permissible for an individual to bring a claim against a state. This case will prove to be a precedent for the cases dealing with organizations and sovereign immunity claims and will show the way to deal with them correctly.