Procedural Background and Key Issues

This Final Award, rendered by a tribunal constituted under the auspices of the International Centre for Settlement of Investment Disputes (ICSID), resolves a dispute between Asian Agricultural Products Ltd. (AAPL), a Hong Kong corporation, and the Republic of Sri Lanka. The claim was brought under the 1980 Bilateral Investment Treaty (BIT) between the United Kingdom and Sri Lanka. The dispute arose from the destruction of AAPL's investment in a Sri Lankan shrimp farm, Serendib Seafoods Ltd., during a counter-insurgency military operation conducted by Sri Lankan security forces in January 1987.

The central legal issues concerned the standard of protection owed to the investment under the BIT. AAPL primarily argued that the "full protection and security" (FPS) clause in Article 2(2) of the BIT imposed a strict or absolute liability on the host state for the loss. In the alternative, AAPL contended that under Article 4(2) of the BIT, which addresses losses from destruction by state forces, compensation was due because the destruction was not caused in combat action or required by the necessity of the situation. Sri Lanka countered that the FPS standard merely incorporates the customary international law standard of "due diligence" and that it was not liable as the destruction occurred during a legitimate combat operation against insurgents.

Tribunal's Analysis on Liability

The Tribunal first established that the applicable law was the Sri Lanka/UK BIT as lex specialis, supplemented by rules of customary international law. In a significant finding, the Tribunal rejected AAPL's interpretation of the FPS clause as creating strict liability. Citing international jurisprudence, including the ICJ's decision in the *ELSI* case, the Tribunal held that the FPS standard is not an absolute guarantee against harm but rather an obligation on the host state to act with due diligence. The addition of the word "full" does not transform the nature of the obligation into one of strict liability, though it may imply a heightened standard of vigilance.

The Tribunal then found that the conditions for applying the specific remedy under Article 4(2) of the BIT were not met. It determined that the military operation qualified as "combat action" within the modern context of guerrilla warfare, and the Claimant had failed to prove that the destruction was not required by the necessity of the situation. Consequently, the claim under Article 4(2) was dismissed.

However, the Tribunal found Sri Lanka liable for a breach of its due diligence obligation under the general standard of protection derived from Articles 2(2) and 4(1) of the BIT. The Tribunal concluded that the Sri Lankan government, despite having an established channel of communication with the company's management and being aware of the impending military operation, failed to take reasonable precautionary measures to protect the investment. This omission, specifically the failure to seek the removal of any suspected insurgents from the farm prior to the operation, constituted a breach of the state's duty to provide protection and security.

Decision on Quantum and Costs

Having established liability, the Tribunal awarded AAPL compensation for the value of its investment. It assessed the value of the tangible assets at USD 460,000. The Tribunal rejected claims for intangible assets, such as goodwill and future profits (lucrum cessans), on the grounds that the shrimp farm was a new enterprise with no history of profitability, rendering such claims overly speculative. The Tribunal awarded interest on the principal sum at a rate of 10% per annum from the date of the request for arbitration until the date of payment. The costs of the arbitration were apportioned between the parties, with Sri Lanka bearing 60% of the Tribunal's fees and expenses.