UK: Dispute Resolution Through ICSID

Arbitration has long been the preferred method of resolving investment disputes. It offers a private and neutral forum outside the jurisdiction of the country into which the investment was made. Furthermore the parties can appoint arbitrators with the appropriate specific technical or legal expertise for the particular type of dispute. Arbitration also offers greater prospects of enforceability than a judgment of a national Court given the extensive ratification of the New York Convention¹.

The International Centre for Settlement of Investment Disputes (ICSID) was established in 1966 by a multilateral treaty: the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (The Washington Convention)². It was created by the World Bank as an institution specially designed to facilitate the settlement of investment disputes between governments and foreign investors. It was hoped that such an institution would foster confidence between States and foreign investors conducive to increasing the flow of private international investment.

Although it maintains close links with the World Bank and is headquartered in Washington D.C., ICSID is an autonomous international organisation. The Centre is run by an Administrative Council comprising one representative from each Contracting State. It does not itself engage in conciliation and arbitration, which is the task of the conciliators and arbitrators appointed by the parties, but assists in the initiation and conduct of those proceedings, performing a range of administrative functions.

ICSID proceedings do not necessarily have to be held in Washington. The Convention contains provisions that facilitate advance stipulations of other venues and the parties are free to agree to conduct their proceedings at any other place (Articles 62 and 63).

The Washington Convention is, of course, the key document since it is signed and ratified by the Contracting States and sets out their intentions regarding the establishment of the Centre, its administration and the basic rules governing both the conciliation and arbitration procedures.

The Institution’s Rules set out the procedure for instituting either conciliation or arbitration proceedings including prescribing the details to be included in the formal written Request for Arbitration, payment of the appropriate fee and the constitution of the Arbitral Tribunal (consistent with Articles 37-40 of the Washington Convention). For example, the Request must include the "credentials" of the parties to confirm that they are either a "Contracting State" or a National of a Contracting State and also indicating the date of the consent in writing to ICSID arbitration.

The Rules of Procedure (the Conciliation Rules and the Arbitration Rules) contain the procedural rules, again reflecting the terms of the Washington Convention.

The extent of ICSID’s jurisdiction is set out clearly in the Washington Convention, namely:

• The subject matter must be a legal dispute arising directly out of an investment.

• The dispute must be between a Contracting State (see below) and a national of another Contracting State.

• The parties to the dispute must consent in writing to submit to the jurisdiction of ICSID.

It should be noted, however, that although recourse to ICSID arbitration is entirely voluntary, once the parties have consented to arbitration under the Washington Convention, neither can unilaterally withdraw its consent. (Article 25(1) of the Washington Convention).

Article 26 provides that:

An Arbitral Tribunal will determine whether a dispute is not within its jurisdiction or for other reasons is not within its competence (Articles 32 or 41).

The term "investment" is not defined in the Convention and there was, therefore, some concern that an arbitration agreement might be frustrated if a tribunal declared itself incompetent on the ground that it considered the underlying transaction not to be an "investment". This was one of the reasons for the proposal to establish the "Additional Facility."

In 1978 the ICSID Additional Facility Rules were adopted. They give the ICSID Secretariat authority to administer certain proceedings which fall outside the scope of the Washington Convention. The scope within which and the terms on which the Secretariat can administer these proceedings, which are of course not governed by the provisions of the Convention, are set out in the Additional Facility Rules. These are proceedings which concern:

(a) investment disputes where one of the parties is not an ICSID Contracting State or a national of such a State;

(b) disputes which do not arise directly out of an investment but where at least one of the parties is an ICSID Contracting State or a national of a Contracting State. In this case, the underlying transaction must have features which distinguish it from an "ordinary commercial transaction." This term is not defined. However, when the provision was formulated and approved, the Administrative Council recorded the following:

"Economic transactions which (a) may or may not, depending on their terms, be regarded by the parties as investments for the purposes of the Convention, which (b) involve long-term relationships or the commitment of substantial resources on the part of either party, and which (c) are of special importance to the economy of the State party, can be clearly distinguished from ordinary commercial transactions. Examples of such transactions may be found in various forms of industrial co-operation agreements and major civil works contracts."

(c) fact-finding. This is a process, certainly as contemplated by the Additional Facility Rules, for preventing rather than settling legal disputes. The reason for including fact-finding in the Additional Facility was the perceived need in both private and public circles for "pre-dispute" proceedings which could provide the parties with an impartial assessment of facts. If accepted by them, this statement of facts would prevent differences of view arising on specific factual issues in the course of a long term relationship from escalating into legal disputes. It can be a useful tool both in a contractual context as well as in relation to matters such as the interpretation of national guidelines or codes of conduct relating to foreign investment.

One particular attraction of ICSID arbitration is the requirement that each Contracting State, whether or not a party to the dispute, is required to recognise an award pursuant to the Washington Convention as binding and to enforce the pecuniary obligations imposed by the award as if it were a final judgment of the State’s courts. Consequently, ICSID awards are not subject to review by the local courts prior to enforcement (Article 54 of ICSID).

ICSID awards are also not subject to any appeal or to any other remedy except those which are provided for in the Convention itself. Articles 50-52 allow the parties, within continued on page 8 a specified timeframe, to request either the interpretation, revision or annulment of the Award by an application in writing addressed to the Secretary-General who will then, if possible, submit that to the Tribunal which originally rendered the Award for consideration. Revision, for example, can be requested on the ground of discovery of some fact unknown to the Tribunal and to the Applicant which would decisively affect the Award. Annulment can only be applied for, for example, on the grounds that the Tribunal manifestly exceeded its powers or that there was corruption or a serious departure from a fundamental rule of procedure.

The fact that the host State and the investor’s State of nationality have both ratified the Washington Convention is not sufficient to amount to "consent in writing" to submit to ICSID jurisdiction for the purposes of Article 25. The Convention does not, however, prescribe how the parties should express their consent.

Traditionally consent would take the form of an arbitration clause in an investment agreement submitting future disputes arising from the investment operation to ICSID’s jurisdiction. More frequently nowadays, consent may result from a unilateral offer by the host State, expressed in its legislation or in a treaty, which is subsequently accepted by the investor.

Such advance consents by governments to submit investment disputes to ICSID arbitration can be found in about 20 investment laws and in over 900 bilateral investment treaties (BITs). Arbitration under the auspices of ICSID is similarly one of the main mechanisms for the settlement of investment disputes under four recent multilateral trade and investment treaties:

Consent through the host State legislation is mainly encountered among developing countries in a law or Code offering incentives to investors. The first case in which an investor successfully initiated arbitration on the basis of a unilateral promise contained in an investment law was the case of Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt which concerned a tourism development project. The Request for Arbitration was based on an article of Egypt’s Law which provided that:

Egypt claimed that the clause referring to ICSID was not self-executing and required a separate implementing agreement with the investor. However, the arbitral tribunal found that it established a mandatory and hierarchical sequence of dispute settlement procedures and constituted an express "consent in writing" to the Centre’s jurisdiction within the meaning of Article 25 of the Convention in those cases where there was no other agreed upon method of dispute settlement and no applicable bilateral treaty.

Whether a reference in a national law to dispute settlement by ICSID in fact amounts to consent to the jurisdiction or constitutes a unilateral offer to the investor to accept ICSID jurisdiction is an area which needs to be carefully considered by the investor. This is an argument frequently raised by the State to avoid ICSID jurisdiction. The form of such references is also quite varied and one cannot necessarily take comfort from an earlier tribunal’s determination on jurisdiction. Unlike the Egyptian law referred to above (which has incidentally since been amended), some laws include a reference to ICSID as only one of several possible means of dispute resolution (including ad hoc arbitration under UNCITRAL Rules, ICC arbitration and procedures provided by bilateral investment treaties).

The provisions in the host State’s legislation can only constitute an offer to submit to ICSID jurisdiction; it has to be accepted by the investor performing some reciprocal act to perfect consent. The investor may accept the host State’s offer by bringing a Request for Arbitration to the Centre. However, it is advisable to make any acceptance as clear as possible, particularly given the propensity of States to argue lack of jurisdiction due to the absence of "consent in writing" (as in the case of Egypt referred to above).

There appears to be an increasing recognition of the value of arbitration through ICSID. The recent marked increase in the ICSID caseload has undoubtedly been affected by the consents to ICSID arbitration put in place by bilateral investment treaties. These now make up the majority of the new cases submitted to ICSID, currently running at approximately one new case per month.

Of the 6 new ICSID arbitration proceedings initiated since Autumn 2000, all but one have been instituted by foreign investors relying on the host State’s consent to ICSID arbitration recorded in BITs. With the influx of cases based on general consents of Contracting States in their laws and treaties, only a minority of the proceedings before the Centre now concern disputes exclusively over the performance of investment contracts concluded by the States. The cases now more typically concern claims over such events as civil strife in the State, alleged expropriation or denials of justice by it and actions of its political subdivisions.

The 38 pending cases (commenced since 1997) concern over 25 different countries and subject matters emerging from oil and gas development contracts to general home and insurance enterprises.