Originally from American Review of International Arbitration - ARIA

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This case began when an investment dispute arose between a Hong Kong-based company, Asian Agricultural Products Ltd. (“AAPL”) and the Government of Sri Lanka.1 The claim was based on the Bilateral Investment Treaty between the government of the United Kingdom and the government of Sri Lanka (“BIT,” “SL/UK Treaty,” or “Treaty”),2 which entered into force on February 13, 1980. Article 11 of the SL/UK Treaty provides for the extension of the treaty’s provisions to territories for whose international relations the UK is responsible; Hong Kong acceded to the treaty by virtue of an exchange of letters with effect from January 14, 1981. AAPL had a minority shareholding in Serendib Sea Foods (“Serendib”), which engaged in prawn farming in the Eastern Province of Sri Lanka.

In January 1987, the Liberation Tigers of Tamil Ealam (“LTTE”), a sophisticated separatist guerilla group, was engaged in a major insurrection in the Northern and Eastern Provinces of Sri Lanka, in which it established control of the area surrounding the Serendib farm in the Batticaloa District. Later the same month, Sri Lankan security forces staged a counter-insurrection known as “Operation Day Break.” The Serendib farm, which was in close proximity to the LTTE headquarters, sustained extensive damage during the operation.

The claimant (AAPL) alleged that as a direct consequence of Operation Day Break it suffered a total loss of its investments and claimed compensation amounting to approximately nine million dollars. As the legal basis for the liability of the respondent (the government of Sri Lanka), the claimant invoked:

(i) the obligation of “full protection and security” provided for in article 2 of the BIT,3 which the claimant contended imposed strict liability;

(ii) the obligation set out in article 4(2) of the BIT,4 requiring the payment of compensation for the destruction of an investment under circumstances not justified by combat action or by the necessities of the situation; and

(iii) the liability under customary international law for damage and/or injuries to aliens.