Case Overview

In (DS)2, Peter de Sutter and Kristof De Sutter v. Madagascar, an ICSID tribunal found the host state liable for breaching its obligation to provide full protection and security to the claimants' investment. The dispute, brought under the 2005 Belgium-Luxembourg Economic Union-Madagascar BIT, arose from the destruction of the claimants' garment factory during a period of political unrest in January 2009 and subsequent alleged state interference in domestic legal proceedings against the investment's insurer. The tribunal, presided over by Gabrielle Kaufmann-Kohler, held that Malagasy authorities failed to take reasonable and available measures to protect the factory from being looted and burned down by a mob, despite having been warned of the risk. The tribunal awarded the claimants approximately €6.9 million in damages plus interest.

Procedural History

The claimants filed a Request for Arbitration with ICSID on May 3, 2017, which was registered on June 14, 2017. The three-member tribunal was constituted with Gabrielle Kaufmann-Kohler as President, Carole Malinvaud as the claimants' appointee, and Alain Pellet as the respondent's appointee. After a full briefing on jurisdiction and merits, a hearing was held in Paris, France, in July 2019. The tribunal rendered its final award on April 17, 2020, upholding jurisdiction and finding for the claimants on the merits.

Key Issues and Positions

Jurisdiction

Madagascar raised several objections to the tribunal's jurisdiction. It argued that the claimants were not protected "investors" under the BIT, contending that (DS)2 S.A. was a fictitious holding company without a genuine economic link to Luxembourg (*ratione personae*). It also challenged whether the claimants' shareholding in the local Malagasy company, Polo Garments Majunga (PGM), constituted a protected "investment" (*ratione materiae*). Furthermore, Madagascar characterized the dispute as a purely contractual insurance matter outside the tribunal's treaty-based jurisdiction and alleged that the claimants had failed to comply with the BIT's pre-arbitration notification requirements. The claimants countered that they fully met the nationality and investment definitions in the BIT and ICSID Convention, and that their claims were based on breaches of international law, not domestic contract law.

Merits

The claimants asserted that Madagascar breached multiple BIT protections. The primary claim was for a violation of the full protection and security (FPS) standard under Article 3(2) of the BIT, based on the state's failure to prevent the destruction of the PGM factory in Mahajanga. They also alleged breaches of the fair and equitable treatment (FET) standard and a denial of justice, stemming from alleged executive and judicial interference that thwarted their efforts to recover insurance proceeds in Malagasy courts. Madagascar denied all breaches, arguing that its security forces acted reasonably within a chaotic, revolutionary context and that its actions were excused by defenses of necessity and force majeure. It maintained that the domestic judicial proceedings were conducted properly.

Tribunal/Court Reasoning and Holdings

Jurisdiction

The tribunal dismissed all of Madagascar's jurisdictional objections. It found that the individual claimants were Belgian nationals and that the corporate claimant, (DS)2, had a sufficient real and continuous link to Luxembourg to qualify as an investor. The tribunal affirmed that the claimants' direct and indirect shareholding in PGM was a protected investment under the BIT. It decisively rejected the attempt to re-characterize the dispute as a contractual one, clarifying that the claims arose directly from alleged breaches of the BIT by the state. The tribunal also found that the claimants' pre-arbitration notice of dispute was sufficient to cover the FPS claim.

Merits

The tribunal's merits analysis centered on the FPS claim. The tribunal found that the claimants had warned Malagasy authorities in December 2008 of social unrest at the factory. On the day of the attack, January 27, 2009, security forces were alerted to the approaching mob but arrived late and in insufficient numbers. The evidence showed that once on site, the gendarmerie remained passive, failed to secure the perimeter, retreated behind buildings, and ultimately abandoned the site entirely before midnight, allowing the factory to be looted and burned down. The tribunal concluded that this constituted a manifest failure to take reasonable measures to protect the investment, violating the FPS standard. It rejected Madagascar's defenses of force majeure and necessity, finding the state's inaction was not justified by the circumstances. Exercising procedural economy, the tribunal did not rule on the other alleged breaches (FET, denial of justice), as the damages for the FPS breach would cover the same harm.

Quantum/Damages

The tribunal awarded damages based on the value of the destroyed factory. It adopted the net asset value method, finding it more conservative and appropriate than a DCF valuation given the company's recent financial difficulties. The tribunal used the insured replacement value from the company's 2007 insurance policy (€8.2 million) as a reliable basis for the valuation, arriving at a principal amount of €6,451,113.24 after currency conversion. The tribunal also awarded €474,488 for conservation costs incurred in 2009 to manage the immediate aftermath of the destruction but rejected claims for subsequent years and for financing costs.

Costs

Based on the mixed success of the parties—with the claimants prevailing on jurisdiction and liability but receiving a reduced quantum—the tribunal ordered Madagascar to bear two-thirds of the arbitration costs. Each party was ordered to bear its own legal fees and expenses.

Disposition / Relief

The Tribunal ordered the Republic of Madagascar to pay the Claimants a total of €6,925,601.24, comprising €6,451,113.24 in principal damages and €474,488 for conservation costs. The award included compound interest at the Euribor 12-month rate plus 2%. Madagascar was also ordered to reimburse the Claimants for two-thirds of the arbitration costs, amounting to USD 348,243.61. All other claims were dismissed.