Compensation is one of the principal forms of reparation recognised in international law, alongside restitution and satisfaction. It is owed by a state that has committed an internationally wrongful act when the injury cannot be made good by restitution. The doctrine is codified in Article 36 of the International Law Commission's Articles on Responsibility of States for Internationally Wrongful Acts (ARSIWA, 2001), which provides that compensation shall cover "any financially assessable damage including loss of profits insofar as it is established."
The foundational standard was articulated by the Permanent Court of International Justice in the Factory at Chorzów case (Germany v. Poland, 1928), which held that reparation must "wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed." Where full restitution is impossible, monetary compensation substitutes.
Compensation appears in several distinct contexts:
- State responsibility — payments between states for wrongful acts (e.g., the United States' 1996 ex gratia payment to Iran for the 1988 USS Vincennes downing of Iran Air 655).
- Investor-state arbitration — awards under bilateral investment treaties and ICSID, typically calculated on fair market value of expropriated assets.
- Expropriation — customary international law requires "prompt, adequate, and effective" compensation (the Hull formula), though developing states have historically favoured an "appropriate compensation" standard reflected in UN General Assembly Resolution 1803 (1962).
- International humanitarian law — Article 3 of Hague Convention IV (1907) and Article 91 of Additional Protocol I (1977) require belligerents to pay compensation for violations.
- Mass claims — bodies such as the UN Compensation Commission (established by UNSC Resolution 692, 1991) processed claims against Iraq arising from the invasion of Kuwait, paying out roughly $52.4 billion before concluding in 2022.
Compensation does not include punitive damages under general international law; quantum is restitutionary, aimed at the injury actually suffered.
Example
In 1996, the United States paid $61.8 million to settle claims by Iranian victims' families after the USS Vincennes shot down Iran Air Flight 655 in 1988, without admitting legal liability.