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QLLM397 – Investment Treaty Arbitration -Session 4 – ICSID History and Introduction – readings
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Session 4 – ICSID History and Introduction – Readings Mistelis & Kröll: Comparative International Commercial Arbitration – Chapter 28 Arbitration of Investment Disputes para 28-1 – 28-42, and 28-117 – 28- In developing countries, foreign investment often relations to core components of the national economy e.g. GNP making the investment vulnerable to possible interference by the host state e.g. through prohibitions on price increases, tax increases or new taxes and environmental legislation. BITs and MITs were entered into in order to create a favourable climate for foreign investment where international organisations were established to promote these treaties and conventions to create a worldwide standard of foreign investment. Some countries implemented specific investment laws to provide legal certainty sought by investors. Investors have little faith in national courts while states are also unwilling to submit to foreign courts. Most international conventions provide for arbitration as the preferred method of dispute settlement (UNCITRAL, ICC, SCC, ICSID). Special features of investment disputes arbitration Amount in dispute is large and there may be considerable political implications. Disagreements often concern the objectives of the investment, repatriation of revenues and ultimate control and benefit of the investment e.g. completion of infrastructure which is vital for the national economy. Outcome may also affect general investment climate in the country. There is a great tendency to delocalise and apply principles of international law. The greatest difference to commercial arbitration is the source of the tribunal’s power. Commercial arbitrations require an arbitration agreement between the parties. Investment disputes arbitration may be possible without the arbitration agreement. National legislation/treaties may give each party the right to initiate arbitration proceedings against the other. Provisions relating to investment arbitrations in national laws or treaties constitute a unilateral offer to the public to submit to arbitration with any party fulfilling the requirements. The offer is accepted by the investor when it initiates arbitration proceedings against the state. The tribunal will interpret the statutes, treaties and conventions to see whether the dispute falls within the ambit of the state’s obligation to arbitrate in these instruments. Nationality is often an important issue as the offer to arbitrate may only extend to nationals of certain countries. When a dispute arises, it’s necessary to determine the actual investor, whether it’s the local company, direct shareholders or someone further down the line of control. National investment laws National investment law objectives are to provide an investor friendly environment and attract foreign investment by guaranteeing certain minimum standards e.g. no discrimination, expropriation etc. These protections generally extend to all foreign investors.
SPP v Egypt – arbitration arose out of an abandoned project to construct a hotel complex. SPP tried to initiate arbitration on the basis of a provision in a national investment law. Round 1 - ICC award given to SPP. This award was later annulled for lack of an arbitration agreement with Egypt. Round 2 - SPP started ICSID arbitration proceedings on the basis on national law which allowed the settlement of disputes by ICSID. Egypt objected on three grounds (all rejected by the tribunal): -claimants had not consented to ICSID jurisdiction because it first initiated ICC proceedings (fork in the road argument). Tribunal – sending a request for arbitration and a letter to the minister, the investor had consented to ICSID arbitration. Not barred by Art 26 of the ICSID Convention which excludes all other remedies. -Egypt denied applicability of national law because approval for the project had been withdrawn before proceedings had commenced. National law only covered investments which had approval. Tribunal – withdrawal was invalid and the dispute was covered by national law because withdrawal violated protection guaranteed under investment law. -Egypt argued that even if national law applied, the relevant article would not suffice to establish Egypt’s consent to ICSID jurisdiction. Tribunal – despite the difference in language versions, it still created a binding offer for arbitration that covered this dispute. The tribunal made it clear that it was not bound by the interpretation of the provisions submitted by the state party which drafted them. Bilateral Investment Treaties BITs are an effective and well used mechanism to guarantee protection of foreign investments. They contain provisions for certain defined categories of investments providing for arbitration. The scope and content differs depending to the states and their respective bargaining power. BITs generally constitute a unilateral offer by the state to all investors from other states to settle disputes by arbitration. Often, the exhaustion of local remedies is made a prerequisite for the right to arbitration. The type of arbitration provided will also vary in BITs. Some provide for ICSID arbitration or give investors a choice between ICSID and other institutions (e.g. SCC). But arbitration is normally the last stage in a multi-tier dispute resolution clause (negotiations, diplomatic efforts). Vivendi v Argentine Republic – Vivendi had entered into a concession agreement with a province of Argentina. The agreement didn’t make reference to the BIT between Argentina and France stating that disputes should be submitted to the exclusive jurisdiction of the administrative courts of the province. Vivendi started ICSID proceedings against Argentina which wasn’t party to the agreement or participated in the negotiations. Vivendi argued that actions taken by provincial authorities constituted a breach by Argentina of the BIT and so the claims against Argentina are covered by the BIT which provided ICSID arbitration. Tribunal – assumed jurisdiction. Argentina was not affected by the exclusive jurisdiction but could still be referred to arbitration under ICSID. NAFTA The North American Free Trade Agreement was entered into by the US, Canada and Mexico to create a liberalised common market between the three countries. Chapter 11 of the agreement sets out the substantive obligations of the contracting states, provides dispute settlement mechanisms and defines the significant terms used in the chapter.
If no reservation is made, the existence of a valid ICSID arbitration clause, according to art 26, excludes any other means of legal recourse to enforce claims. 28-117 – 28- Arbitration under ICSID Additional Facility Rules These provide for dispute settlement facilities for disputes between a state and a foreign party which is not covered by the ICSID Convention. Jurisdiction rules here require that either the state or the private party’s state of origin is a Contracting State to the ICSID Convention. The dispute must involve a transaction which by the intention of the parties, its duration/importance goes beyond an ordinary commercial contract. Rewards made under the AFR may be subject to challenge in the courts of the place of arbitration as the self-contained and exhaustive review system of the ICISD convention is not applicable. Awards have to be enforced under the New York Convention. UNCTAD Dispute Settlement – ICSID 2.1 (Overview) Introduction The volume of capital transfers through FDI is considerably larger than all forms of development aid, bilateral and multilateral. FDI contributes to the improvement of infrastructures in developing countries e.g. tele-communication systems, roads and airports. Much of the investment climate in a country will consist of economic and political factors such as market access, availability and cost of production factors, taxation etc. The legal environment is determined by stability of legal conditions, quality of the local public administration in applying relevant regulations and transparency. BITs contain substantive as well as procedural guarantees to investors of specific countries similar to regional treaties. Settlement of investment disputes Disputes between a host state and an investor will sometimes be settled through domestic courts of the host state. For investors, this is disadvantageous because national courts are not regarded as impartial and are bound to apply domestic law which may not protect an investor’s rights under international law. Diplomatic protection is frequently used where the investor’s home state will engage in negotiations/litigation with the host state before an international court/arbitral tribunal. But in order to use this protection, local remedies must have been exhausted in the host country and this protection is discretionary which means the investor has no right to it. Diplomatic protection may also lead to tensions in the relations of the states concerned. International arbitration is an attractive alternative. It is usually less costly and more efficient than regular litigation, offers parties opportunities to select arbitrators and assures confidentiality of the proceedings. Ad hoc arbitration occurs where arbitration is not supported by a particular institution requires an arbitration agreement (compromis) that regulates a number of uses including selection of arbitrators, applicable law and procedural questions. Ad hoc arbitration is subject to the rules of the arbitration law of the country in which the tribunal has its seat.
The history of the ICSID Convention The WB initiated a mechanism specifically designed for the settlement of disputes between host states and foreign investors. The report adopted in 1965 was called the Convention on the Settlement of Investment Disputes between States and Nationals of Other States which created ICSID. The Convention entered into force on 14 October 1966. Most participating states were developing countries in Africa. The first case was not decided before 1974. The Additional Facility was created in 1978 to offer methods for the settlement of investment disputes where only one of the relevant states is a party to the Convention. The AF can also be used for disputes which do not directly arise out of an investment/for fact-finding proceedings. It is subject to its own rules and regulations and the Convention doesn’t apply to it. The purpose of the ICSID Convention The Convention’s primary aim is the promotion of economic development. The creation of an institution designed to facilitate the settlement of disputes between states and foreign investors can be a major step toward promoting an atmosphere of mutual confidence which helps stimulate a larger flow of private international capital. Protection of investments is also protection of the general interest of development and developing countries (Amco v Indonesia). ICSID offers a system that contains standard clauses, rules of procedure and support for the conduct of proceedings. ICSID proceedings may be instituted by either side. For the investor, it gains direct access to an effective forum should a dispute arise. For the host state, by offering arbitration, it improves the investment climate and could attract more international investments. By consenting to ICSID arbitration, the host State protects itself against other forms of foreign or international litigation. Characteristics of the ICSID Convention ICSID provides for arbitration and conciliation as two methods for solving disputes. Conciliation is more flexible and informal, it ends in a report that suggests a non-binding solution. Conciliation ultimately depends on the willingness of both parties to cooperate. Arbitration is more formal and adversarial but a lot of cases still end in an agreed settlement. Where no settlement is reached, a binding award is issues that may be enforced. Arbitration in practice is preferred over conciliation which is very rare. This is due to the fact that it is necessary to direct effort and expense towards proceedings that will lead to a binding decision. ICSID is specialised in the settlement of investment disputes and a prerequisite of its function is that the dispute must arise directly out of an investment. Although the concept of an investment is not defined in the convention. Many BITs and MITs contain their own definitions of investment. In practice, the concept of ‘investment’ is given a wide meaning. In addition to traditional investment activities, these include pure financial instruments like purchasing government bonds, extending loans. Decisive criteria for the definition of investment are; duration of the activity, regularity of profit and return, presence of a certain economic risk, a substantial commitment and relevance of the project for the host state’s development. ICSID merely offers a procedure for the settlement of investment disputes. But it does contain a rule on applicable law. It directs tribunals to find the rules to be applied to particular
It’s often that BITs offer consent to ICSID, domestic courts, ICC, UNCITRAL or ad hoc tribunals but don’t make a clear choice. Therefore ICSID is one of several possibilities. Some of the clauses require a subsequent agreement of the parties to select one of these procedures. Special nature of investment disputes Disputes of an economic nature between states may fall under the jurisdiction of the ICJ or other judicial dispute settlement systems. Mixed disputes – disputes between states and private parties. Mixed disputes were mostly settled before national courts in the past. National courts ICSID does not exclude access to national courts as such, parties to the convention are not automatically prevented from litigation before their own/foreign national courts. However, once they’ve consented to ICSID arbitration, remedies through national courts are in principle excluded. The only exception to ICSID arbitration is where the state has given its consent to arbitration only where local remedies have been exhausted. Most applicable jurisdictional rules will point to domestic courts of the host state as competent forums for the settlement of investment disputes. National courts in this instance will be guided by their own domestic rules of PIL/conflict of laws. National courts may also give automatic preference to the application of national over international law, even if the former contradicts the other. This may mean that the parties are litigating on unequal footing which makes national courts unattractive for investors. National courts may be avoided through express clauses in agreements opting out of national courts. Opting for courts in third states in common but is still an unlikely choice for investment disputes. Dispute settlement in national courts involves sovereign states in an area where they also exercise their sovereignty. Actions brought by private parties against host states could be regarded as inadmissible in national courts due to this sovereignty e.g. in cases of expropriation/regulatory action amounting to expropriation. Act-of-state – Anglo-American traditional doctrine which stops the court from questioning the legality of sovereign acts of the state taken within the territory of the state. The legality of expropriations or validity of national legislation affecting foreign governments may give rise to political questions which are inappropriate for judicial dispute settlement. ICSID Conciliation Parties may have consented to both conciliation and arbitration without specifying any preference. Where one party opts for conciliation, the other party is prevented from instituting arbitral proceedings unless it’s clear that conciliation will be unsuccessful. Conciliation is flexible and informal. It involves a third party assisting the disputants in reaching an agreed settlement. The outcome of the conciliation requires agreement by both parties and the solution cannot be imposed on the parties against their will. Conciliation has proven to be less expensive than arbitration and prevents excessive antagonism. Because it’s consensual, it’s useful in situations where parties are willing to continue their investment cooperation. A major weakness to conciliation is that each party to the dispute can always block the solution.
ICSID Arbitration Arbitration becomes binding only upon written consent of the parties to arbitration either in an investment agreement or otherwise. ICSID offers a fixed set of rules, benefits of institutional support and flexibility and autonomy. The Centre has separate international legal personality and facilitates the arbitration. Arbitration is intended to prevent the risk that one party having previously consented to arbitration obstructs the proceedings by refusing to participate. Once parties have given consent, it cannot be unilaterally withdrawn. The tribunals have exclusive competence to decide on their own jurisdiction, awards are binding and enforceable and cannot be disregarded or challenged unless through the Convention’s annulment procedure. Where a party fails to appoint an arbitrator, the Centre can appoint one for them to stop parties from obstructing proceedings. Jurisdictional requirements relate to the nature of the dispute and the parties (art 25). Subject-matter jurisdiction - legal disputes arising directly out of an investment Personal jurisdiction – contracting states (including designated agencies) and nationals of another contracting state. These requirements cannot be replaced by agreement of the parties. The AFR grant access to ICSID arbitration where the jurisdictional requirements are not wholly met. ICSID arbitration has a number of advantages; it provides investors with direct access to a form of international dispute settlement, investors are not restricted to national courts in the host state, they don’t depend on the willingness of the home states to exercise diplomatic protection on their behalf, and enforcement provisions make it highly probable that a final ICSID award will be effectively enforced. For host states, there is legal security for investors which attracts investments and consent to ICSID arbitration excludes harassment through diplomatic protection by investor’s home state. ICSID is consented to to the exclusion of any other remedy unless there are conditions placed in the agreement. ICSID Additional Facility AFR opened access to the centre in three instances; -conciliation/arbitration where only one side is either party to the Convention or a national of a party to the Convention -conciliation/arbitration of a dispute that doesn’t directly arise out of an investment provided that at least one side is a party to the convention or a national of a party to the convention. -fact finding proceedings between a state and a national of another state. AFR gives a condition that the transaction in dispute must have features which distinguish it from an ordinary commercial transaction. AF arbitration has become important in the context of NAFTA since only the US is party to the convention but not Canada and Mexico. The FTA between Mexico, Colombia and Venezuela gives the investor the option to institute ICSID arbitration, AF arbitration or UNCITRAL arbitration.