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Arbitration before the International Centre for Settlement of Investment disputes
Investor-State dispute resolution has become a subject of increasing importance both to private investors and State parties given the proliferation of bilateral and multilateral investment protection treaties that provide to foreign investors direct recourse to international arbitration for claims against States. The International Centre for Settlement of Investment Disputes (“ICSID” or the “Centre”)[2] is central to this theme as the majority of such treaties provide for ICSID arbitration.
ICSID is a sister organization in the World Bank group that shares in that institution’s goal of promoting economic development through greater flows of international investment. In many ways it is a unique institution in the field of international dispute resolution, as it was established to fulfill a particular need in the global economic community consistent with its World Bank pedigree.
Arbitration under the ICSID Convention has several unique attributes consciously designed to reflect a balancing of interests between the host States and the foreign investors and to provide a de-politicized and effective mechanism of dispute resolution. Among its features, most significantly, is that it is a “self-contained” system that, unlike, for example, ICC or UNCITRAL Rules arbitration, is entirely removed from domestic court systems. An ICSID arbitration is conducted solely in accordance with the international law provisions of the Convention and of the regulations and rules adopted pursuant to it. Arbitral awards rendered pursuant to the Convention are binding on the parties and not subject to any appeal or to any other remedy except those provided for in the Convention itself.[3] National courts have no power to review the awards in any way – rather, they must, on simple presentation of a copy of the award certified by ICSID’s Secretary-General – enforce the pecuniary obligations imposed by the award as if it were a final judgment of the national courts.[4] ICSID’s self-contained nature is such that parties may not seek interim, provisional or conservatory measures from a national court unless they have so agreed expressly in the instrument recording their consent to ICSID arbitration.[5]
The Jurisdiction Of The Centre
The jurisdiction of the Centre extends to (1) any legal dispute (2) arising directly out of an investment, (3) between a Contracting State (or any constituent subdivision or agency of a Contracting State that has been designated to the Centre by that State) and (4) a national of another Contracting State, (5) which the parties to the dispute consent in writing to submit to the Centre.[6]
“Any legal dispute” refers to the fact that a claimant must present a concrete legal claim on the basis of some legal right. An ICSID Tribunal cannot, for example, be convened to issue advisory opinions or fact-finding reports. That the dispute must “aris[e] directly out of an investment” refers to the permissible subject matter of the dispute. The term investment is not defined in the ICSID Convention and ICSID tribunals have been left to assign such parameters to the term as deemed appropriate on a case-by-case basis. The term is understood as embodying a flexible concept, ICSID’s subject matter jurisdiction, however, clearly is limited. The ICSID Convention, for example, was not designed to deal with disputes arising from ordinary sales contracts, i.e., breaches of a contract for the one-time sale of goods.[7]
One of the parties to the dispute must be a Contracting State party to the ICSID Convention (or a constituent subdivision or agency of a Contracting State that has been designated to the Centre by the State). It is possible for a constituent subdivision of a State party or a governmental agency to be a party to an ICSID arbitration, but only if it has been designated to the Centre by the State and if the State has approved the subdivision or agency’s expression of consent.[8]
The other party must be a national of another Contracting State. Thus, the nationals of those States that are not party to the ICSID Convention are not eligible to submit disputes to ICSID. In terms of natural persons, this requirement means that dual nationals (including the nationality of the host State) are not eligible to submit a dispute with the host State to ICSID arbitration, as ICSID was not established to permit a national to arbitrate with its own government.[9] Recognizing that many host States, however, require that foreign investors conduct their operations through locally incorporated companies, the Convention provides that parties may agree that such a company because of foreign control will be treated as a national of another Contracting State for purposes of the Convention.[10]
In other words, parties may agree to permit a locally incorporated project company to be a party to an ICSID arbitration. This provision, contained in Article 25(2)(b) of the ICSID Convention has been the subject of several ICSID tribunal decisions from which the following observations may be made. The requirement that foreign control exist in fact (that is, control by nationals of another Contracting State party) is an objective one that the parties are not free to waive by agreement.[11] Foreign control may be established, however, by direct or indirect foreign ownership, i.e., even through several layers corporate ownership.[12] Foreign control does not necessarily mean foreign majority ownership – control may be established by other means depending on the particular facts and circumstances of the case. Finally, where foreign control is established by means of foreign ownership, one must be attentive to the possibility that a transfer of such ownership (subsequent to the conclusion of an agreement to submit to disputes to ICSID but prior to the filing of a claim) could destroy the entity’s eligibility to submit a dispute to ICSID in a given case.
It is clear that the ICSID Convention was not established to adjudicate disputes between two State parties. The drafters of the Convention, however, anticipated the possibility that the national of the other Contracting State could be a juridical entity owned by a foreign government. The fact that government ownership of an entity does not destroy jurisdiction where the entity was neither performing essentially governmental functions nor acting as agent for the government in respect of the subject matter of the dispute has since been reaffirmed in the context of at least one case.[13]
Finally, the parties to the dispute must have consented in writing to submit the dispute to ICSID. The question of whether parties’ have adequately expressed their consent to ICSID within the meaning of the ICSID Convention is a question that is not governed by international law.[14] Accordingly, an agreement to submit to ICSID arbitration, notwithstanding the fact that it is an agreement involving a State, must not be read either broadly or restrictively, rather such agreements must be read simply in good faith.[15] The parties’ written consent need not be expressed in a single instrument; and once the parties have given their consent, neither party may withdraw its consent unilaterally. Thus, it was contemplated by the drafters of the Convention that a host State may “offer” to submit disputes to ICSID arbitration in investment promotion legislation or a treaty, which an investor may “accept” by submitting by filing a request for arbitration with the Centre.[16]
Agreements To Submit Disputes To ICSID Arbitration
There are several ways to formulate an agreement to submit a dispute to ICSID arbitration: (1) the traditional means of including at the drafting stage of a contract with a qualifying State entity an agreement to submit resulting disputes to ICSID arbitration; (2) the not-often used means of concluding an agreement to submit an existing dispute to ICSID; and (3) the increasingly common means of accepting a State’s “offer” contained in legislation or a treaty to submit to ICSID arbitration.
Due to the jurisdictional limitations and other special features of the ICSID system, drafting an ICSID clause may be complex and inattentive drafting can easily yield unworkable results. For that reason, when it comes to drafting a clause to be inserted in a contract agreeing to submit to ICSID arbitration, it is difficult (and frankly inadvisable) to try to improve upon the excellent guidance found in the ICSID Model Clauses that are available both in hard copy from the ICSID Secretariat and easily accessible on its website. No ICSID arbitration clause should be drafted from scratch without reference to the Centre’s Model Clauses. It may be useful, however, to emphasize a number of essential points in this regard.
Ordinarily, one of the most significant issues in drafting arbitration clauses is choosing a place of arbitration. In an ICC or UNCITRAL Rules arbitration, for example, the choice of the situs of the arbitration constitutes a choice of the procedural or curial law of the proceedings, with significant legal consequences. This is not so for an ICSID Convention arbitration – there is no “situs” of the proceedings, as the arbitration is conducted in accordance with international law (i.e., the ICSID Convention and the regulations and rules issued pursuant to it), not any national law. In accordance with Article 63 of the Convention, the parties may agree to hold hearings at a location other than ICSID’s headquarters in Washington, D.C., but doing so would be for convenience (and possibly cost considerations) only.
An express choice of law is always advisable in contractual relationships – and no less so where the parties agree to submit disputes to ICSID. The ICSID Convention does include default provisions on the issue of governing law in Article 42(1) of which the parties should be aware. It provides that:
The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.
Thus, the most significant issue that the parties will have to address in the absence of an agreement on the applicable law is the extent to which international law will be applicable.[17]
Being a Contracting State party to the ICSID Convention does not constitute consent by the State to submit any given dispute to ICSID. Obtaining a State’s written consent, apart from the Convention itself is required. Parties also should recall that when dealing with a governmental agency, the additional layers of consent required by the Convention should be obtained.
Of course, it is possible to agree to submit an existing dispute to ICSID arbitration. This does not occur too often, however, because once a dispute has arisen it is unusual for a State party to be motivated to agree to submit to ICSID arbitration.
Increasingly, the most common way to refer a dispute to ICSID arbitration is for a foreign investor to accept (by filing a request for arbitration) the offer by a State contained in an increasing number of bilateral and multilateral investment protection treaties to submit covered disputes to ICSID arbitration, as to which a few observations may be made. First, the potential claimant need not have any contractual relationship with the State in order to submit such a dispute to arbitration, a phenomenon that continues to surprise respondent States. Second, a State’s consent to submit disputes to arbitration is limited by the terms of the treaty, a fact that may frustrate potential claimants. Parties are well advised to consider a treaty’s full text carefully to determine whether a particular dispute can be submitted to arbitration. Third (or further to the second point), potential claimants must recognize that usually, the only claims that may be submitted to arbitration under an investment treaty are claims that the State has violated one of the treaty’s substantive provisions and that such violation caused a loss to the investor. That is, the claim must be that the State either acted or failed to act in some capacity that violated the terms of the treaty. Finally, a claim that a State failed to act in accordance with its treaty obligations presents a question of international law.
One might wonder whether it is possible to have multiple parties in an ICSID arbitration. Although the ICSID Convention defines the jurisdiction of the Centre in singular terms, i.e., as extending to disputes between “a Contracting State…or agency of a Contracting State” and “a national of another Contracting State,” there already have been a number of cases involving multiple claimants and a few involving the State together with a government agency, suggesting that as long as ICSID’s particular jurisdictional requirements have been met, multiple parties are possible.
A potentially important issue to bear in mind is that the ICSID Convention permits Contracting States parties to notify the Centre of classes of disputes they would not consider submitting to the jurisdiction of the Centre.[18] Several States have made such notifications including, for example, Saudi Arabia whose notification states that the Kingdom “reserves the right of not submitting all questions pertaining to oil and pertaining to acts of sovereignty” to the Centre.
Finally, large investment projects either that involve political risk insurance or a guarantee from a governmental or intergovernmental entity or that involve complex external lending arrangements present a number of challenges that require attentive analysis for parties seeking to include agreements to submit resulting disputes to ICSID arbitration. An issue that frequently arises in that context stems from the fact that contracts of insurance and loan agreements typically contemplate that the guarantor or lender will succeed or be subrogated to some or all of the investor’s rights or claims upon indemnification under an insurance or guarantee contract or default under a loan agreement. Where the insurer, guarantor or lender (as the case may be) would qualify itself as a claimant in an ICSID arbitration this might not present serious difficulty, particularly when there is advance agreement that subrogation will be permitted.
When the insurer or lender is a governmental or intergovernmental entity, or when the lender is a syndicate of lenders of various nationalities (with rights of assignment), however, the insurer or lender very likely could not step in the shoes of the investor for purposes of the arbitration and subrogation in the traditional sense would not be possible – even with agreement by the parties. Solutions, however, are sometimes available. For example, in the context of an insurance or guarantee contract, the parties might agree that the investor must exhaust its rights of recourse in ICSID arbitration against the host State as a condition for obtaining indemnification. Similar solutions might be available to protect lenders’ interests in a project. Each situation, however, requires careful consideration.
IV. Preparing The Claim
Initiating an ICSID arbitration is a two-step process. The claimant must lodge a Request for Arbitration with the Centre, but the arbitration is not commenced until the Secretary-General registers the Request. The Secretary-General’s obligation to register Requests represents a “screening power” requiring the Secretary-General to conduct a prima facie jurisdictional review of the claim submitted. Article 36(2) of the ICSID Convention provides that the Secretary-General “shall register the request unless he finds, on the basis of the information contained in the Request, that the dispute is manifestly outside the jurisdiction of the Centre.”
Accordingly, parties seeking to commence an ICSID arbitration should be particularly assiduous to demonstrate that each element of jurisdiction is satisfied to ensure that the Request will be registered, as the Secretary-General’s decision on registration is not appealable. On the other hand, potential respondents cannot expect to be able to “lobby” against registration of a Request by presenting evidence or argument against jurisdiction – any objections to jurisdiction must be left for a Tribunal.
The ICSID Arbitration Rules contemplate a procedure based upon the procedure typically found in practice before international tribunals involving State parties. That is, after the Request for Arbitration is registered, there is no “answer” to be filed by the respondent. Rather the Rules contemplate that following a preliminary procedural conference among the parties and the Tribunal,[19] the claimant will file a Memorial (most usually together with all the documentary and other evidence upon which it intends to rely); the respondent will file a Counter-Memorial (again, together with its documentary and other evidence in support); and where the Tribunal deems it warranted, a Reply and Rejoinder may follow.[20] Following that “written phase” of the proceeding, there will be an “oral phase,” that is, a hearing.[21] Of course, as in other systems of arbitration, the ICSID Arbitration Rules are flexible and the Tribunal has considerable discretion to organize the proceedings as it deems appropriate.
V. Constitution Of The Arbitral Tribunal
Several observations may be made regarding constitutional of the arbitral tribunal that are specific to ICSID. First, before a party may appoint an arbitrator, the parties must reach agreement on the number of arbitrators and the method of their appointment.[22] (One should recall that such issues are nearly universally left undetermined in investment treaties.) If the parties fail to reach agreement within 60 days following the registration of the Request, the traditional default rules relating to a three person tribunal may be applied.[23]
Once the number of arbitrators and method of their appointment is agreed, parties are free to appoint an arbitrator directly and are not limited to the Panel of Arbitrators maintained by the Centre. Notably, however, there are limitations regarding nationality. The ICSID Convention provides that unless all members of the Tribunal are appointed by agreement of the parties, the majority of arbitrators must be nationals of States other than the Contracting State party to the dispute and the Contracting State whose national is a party to the dispute.[24] In other words, as the ICSID Arbitration Rules make clear, a party may not appoint a co-national as an arbitrator. That feature of ICSID arbitration was designed with a view toward the goal of creating a depoliticized means of dispute resolution.
Post Award Remedies Under The ICSID Convention
As noted above, one of the most significant features of arbitration under the ICSID Convention is that it is removed entirely from domestic legal systems. It is not possible, therefore, either to resist recognition and enforcement of an ICSID Convention award in any national court or to seek to vacate, annul or set aside an ICSID Convention award in a national court. (Notably, that is not the case for awards rendered under the Rules of ICSID’s Additional Facility. Such awards, which now include the NAFTA Chapter 11 cases brought before the Centre, are subject to enforcement under the provisions of New York Convention and the arbitration laws of the situs of the arbitration.) The only remedies available against an award rendered under the ICSID Convention are those contained in the Convention.[25]
If a dispute arises between the parties as to the meaning or scope of an award, Article 50 of the Convention provides that either party may request an interpretation of the award. The Convention also permits either party to request a revision of the award under Article 51 on the ground of discovery of some fact of such a nature as decisively to affect the award (provided that when the award was rendered that fact was unknown to the Tribunal and to the applicant and that the applicant’s ignorance of that fact was not due to negligence).
In non-ICSID Convention arbitration (including arbitration under ICSID’s Additional Facility) either party may seek to vacate or set aside the award in the national courts of the place of arbitration in accordance with the arbitration law applicable in that forum. For an ICSID award, however, Article 52 of the ICSID Convention provides the only possible means of seeking annulment.
Article 52 provides that either party may seek annulment of the award on the basis of one or more specified grounds – that the tribunal was not properly constituted, that it manifestly exceeded its powers, that one of its members was corrupt, that there was a serious departure from a fundamental rule of procedure and that the award failed to state the reasons on which it was based.
A request for annulment will be heard by an ad hoc committee of three persons appointed by the Chairman of the Administrative Council of ICSID (the President of the World Bank). An ICSID ad hoc committee has the authority to annul the award in whole or in part. If the award is annulled, either party may later resubmit the dispute to a new tribunal. Annulment is a limited remedy – it is not a remedy against an incorrect decision. An ICSID ad hoc committee may not reverse findings of fact or law – it does not have the powers of a court of appeal. (Indeed a new tribunal deciding the merits of a resubmitted case is not bound by the reasons given by the ad hoc committee for annulling the original award.)[26]
VII. Enforcement And Execution Of Awards Rendered Under The ICSID Convention
In the context of international arbitration, the term enforcement refers to the process whereby a national court will recognize an arbitral award as a binding court judgment. In most cases involving international arbitration, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards is applicable and the provisions contained in Article V of that Convention (setting forth the permissible grounds for a court to refuse enforcement) must be considered.
The Contracting State parties to the ICSID Convention, however, are bound by Article 54 of the Convention upon presentation of a copy of the award certified by the Secretary-General of ICSID to recognize the award as binding and to enforce the pecuniary obligations imposed by the award as if it were a final judgment of a court in that State. Thus, every State Party to the ICSID Convention, whether or not the State is a party to the particular dispute at issue, is obligated by treaty to near automatic enforcement of the pecuniary obligations contained in ICSID awards.
When a State does not comply with an award voluntarily, however, obtaining recognition by a national court of the award most likely will be not sufficient. Parties may wish to resort to attachment of assets, but where State parties are involved, sovereign immunities become an issue. The process of obtaining attachment of assets is referred to as execution of an award, and here is where the special protections of the ICSID Convention end. Execution of an ICSID award is governed by the laws concerning the execution of judgments in the State in whose territory execution is sought and the laws of that State relating to immunities.[27]
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