Getting The Deal Through logo
Getting The Deal Through

ICSID

Harold Frey and Hanno Wehland

Lenz & Staehelin

Friday 09 February 2018


Introduction to ICSID arbitration

This chapter deals with arbitration under the rules of the International Centre for Settlement of Investment Disputes (ICSID), subsequently referred to as ICSID arbitration. ICSID was established in 1966 through the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention) and is one of the five international organisations that are part of the World Bank Group. Its main purpose is to provide institutional support for conciliation and arbitration proceedings in relation to international investment disputes. In terms of structure, ICSID consists of an administrative council composed of representatives of its current 153 member states and a secretariat headed by its secretary-general.

The unique character of ICSID arbitration derives from the fact that, unlike standard commercial arbitrations, ICSID proceedings are largely detached from national legal orders and, in particular, are not subject to supervision by the courts at the seat of the arbitration. This ‘self-contained’ nature of the ICSID process is particularly relevant when it comes to the setting-aside of ICSID awards and – to a lesser extent – also with regard to the enforcement of awards. ICSID arbitration must be distinguished from arbitration under the rules of ICSID’s additional facility, which is not governed by the ICSID Convention and will not be addressed in this chapter.

ICSID arbitration and treaty-based arbitration

The notion of ICSID arbitration is closely associated with treaty-based proceedings, and most ICSID arbitrations today arise under international investment agreements (IIAs). These treaties usually confer both substantive and procedural rights to investors with the nationality of one signatory making an investment in the territory of another signatory. In particular, most IIAs contain a dispute resolution clause through which the signatories give their generic advance consent to international arbitration with investors of any other signatory, provided that these investors meet certain requirements.
In terms of substantive protection standards, while IIAs show a fair degree of variation in this regard, a number of standards can be found in most of them. These include the protection of investors in the event of expropriation, the guarantee of fair and equitable treatment, full protection and security, national treatment, most-favoured-nation treatment, the prohibition of unreasonable or discriminatory measures and, to a lesser extent, ‘umbrella’ clauses. The content of each of these standards needs to be determined in accordance with the relevant principles of treaty interpretation, and tribunals typically refer to a growing body of arbitral precedent when interpreting the substantive provisions of an IIA.

Observing the standards contained in a treaty is an international obligation of the signatories, and conduct attributable to a state that is not in conformity with an investment protection standard will usually constitute an international wrong, entailing the consequences set out in articles 28 et seq of the 2001 ILC Draft Articles on State Responsibility. In particular, a state breaching its obligations under an IIA has the duty to cease the act constituting the breach (if it is still continuing), and the obligation to repair any injury caused by the breach. In practice, the large majority of treaty-based arbitrations relate to claims for compensatory damages.

While the majority of ICSID arbitrations today arise under IIAs, ICSID proceedings can in principle also be based on a contract or a domestic investment law. Conversely, while the majority of treaty-based arbitrations take place under the regime established by the ICSID Convention, a significant number of treaty-based proceedings are conducted outside the ICSID framework, in particular, under the UNCITRAL Arbitration Rules. ICSID arbitrations and treaty-based arbitrations are therefore best seen as two partially intersecting circles, and the two notions (ICSID arbitrations on the one hand, treaty-based arbitrations on the other) need to be carefully distinguished.

Jurisdiction of ICSID

Article 25(1) of the ICSID Convention establishes certain requirements for the ‘jurisdiction of the Centre’, often referred to as ratione materiae, ratione personae and ratione voluntatis. According to article 41 of the ICSID Convention, each of these requirements must be fulfilled for a dispute to fall within the competence of a tribunal established under the ICSID Convention.

Jurisdiction ratione materiae

Article 25(1) ICSID provides that the jurisdiction of the Centre is limited to ‘legal dispute[s] arising directly out of an investment’. While the ICSID Convention does not define the notion of ‘investment’, it has long been argued on the basis of the Convention’s negotiating history that the term must be given an autonomous meaning. ICSID tribunals, therefore, frequently assess the existence of certain criteria thought to be inherent to the notion of ‘investment’ when examining their competence. These criteria, which are often referred to as the ‘Salini test’ (based on one of the early decisions discussing them), are typically described as follows:

  • a commitment of resources to the host state’s economy;
  • a certain duration of this commitment;
  • the assumption of risk and the expectation of profit; and
  • a contribution to the host state’s economic development.

Recent decisions have supported the idea that the Salini criteria should be applied with some flexibility and suggested that not all of them necessarily need to be fulfilled for there to be an investment.

Jurisdiction ratione personae

In addition, article 25(1) of the ICSID Convention requires that the dispute be ‘between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by the State) and a national of another Contracting State’. Article 25(2) ICSID defines the term of ‘national of another Contracting State’ as encompassing both natural and juridical persons. With regard to natural persons, article 25(2)(a) specifically excludes dual nationals with the nationality of the respondent state. In terms of juridical persons, article 25(2)(b) extends the Centre’s jurisdiction to foreign-controlled juridical persons with the nationality of the state that is a party to the dispute, provided that there is a specific agreement in this regard.

Jurisdiction ratione voluntatis

In addition to the ratione materiae and ratione personae jurisdiction requirements, article 25 of the ICSID Convention requires the consent of the parties to submit their dispute to the Centre. In contract-based arbitrations, this consent typically results from an arbitration clause in the contract.
By contrast, in treaty-based arbitrations, the arbitration agreement is formed when the investor accepts the host state’s offer to arbitrate contained in the dispute resolution clause of the relevant international investment agreement, usually by filing a notice of arbitration. Given that the host state’s offer to arbitrate is made only to protected investors, protection under the treaty effectively becomes another jurisdictional requirement. In addition, tribunals in treaty-based arbitrations have frequently found their jurisdiction to be limited to situations where the investors could show the existence of a prima facie case regarding a breach of the relevant treaty.

ICSID arbitration procedure

The procedure in ICSID arbitrations is primarily governed by the relevant provisions in the ICSID Convention, the Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings (the Institution Rules) and the Rules of Procedure for Arbitration Proceedings (the Arbitration Rules). In general, the procedure is fairly similar to the procedure applied in proceedings before other arbitral institutions.

Constitution of ICSID tribunals

By default, ICSID tribunals consist of three arbitrators, one (who must not have the nationality of either party) to be appointed by each party, with the chair to be appointed by agreement of the parties. If a tribunal has not been fully constituted within 90 days of registration of a case, either party may request the president of the World Bank to appoint the remaining arbitrators. The necessary appointments are then made from ICSID’s panel of arbitrators, which is a list of individuals nominated primarily by the member states. Here again, the arbitrators to be appointed must not have the nationality of either party to the dispute.

With regard to arbitrator challenges, where a single member of a three-member tribunal is being challenged, the challenge is decided by the other tribunal members. By contrast, where a challenge relates to more than a single member of a three-member tribunal, it is decided by the president of the World Bank. The same is true if, in the event of a challenge against a single tribunal member, the other two arbitrators cannot agree on whether to uphold or reject the challenge. The challenging party bears a heavy burden of proof, having to show a ‘manifest lack’ of the capacity to exercise independent judgment on behalf of the challenged arbitrator. Historically, only a handful of arbitrator challenges in ICSID proceedings have been successful.

The conduct of ICSID proceedings

Subject to any mandatory provisions in the ICSID Convention, the proceedings before an ICSID tribunal can in principle be determined by the parties. Article 44 of the ICSID Convention provides that a tribunal is the master of the proceedings before it to the extent where procedural questions are not determined by the Convention, an agreement of the parties, or the Arbitration Rules.

With regard to interim relief, parties can request an ICSID tribunal to ‘recommend’ provisional measures for the preservation of their rights, but there is no mechanism for enforcing a tribunal’s recommendations. In the absence of a specific agreement to the contrary, parties are prevented from seeking interim relief from any other judicial authority.

A respondent can raise preliminary objections with regard to the claims brought against it. There are two different procedures in this regard. The normal procedure under rule 41(1) of the Arbitration Rules requires a respondent to raise preliminary objections ‘as early as possible’. The tribunal can then decide to suspend the proceedings on the merits and seek submissions of the parties with regard to the objections, which frequently leads to a bifurcation of the proceedings and a first phase ending with a decision on jurisdiction and admissibility. Where a tribunal dismisses a respondent’s preliminary objections without deciding on the merits of the case, that decision can only be challenged once a final award has been rendered.

In addition, rule 41(5) of the Arbitration Rules provides for an expedited preliminary objections procedure allowing the quick dismissal of claims that are ‘manifestly without legal merit’. Under this procedure, objections must be raised within 30 days of the constitution of the tribunal and, in any event, before the tribunal’s first session. The provision has been held to apply not only to jurisdictional objections, but to all sorts of defences, including those relating to the merits of a case.

Otherwise ICSID proceedings typically follow a sequence similar to that under other arbitration rules, with a written phase consisting of two submissions by each party, followed by an oral hearing including the examination of factual and expert witnesses.

With regard to document production, article 43(a) ICSID and rule 34(2)(a) of the Arbitration Rules explicitly provide that a tribunal has the power to request the production of documents from a party.

It also bears noting that rule 37(2) of the Arbitration Rules allows ICSID tribunals to admit written amicus curiae submissions after consulting the parties, even where the parties do not agree in this regard.

ICSID awards

Regarding the content of ICSID awards, the Arbitration Rules specify that they must state the reasons on which they are based and include a decision on the allocation of costs between the parties. Awards can be rendered by a majority of votes, and arbitrators have the possibility to issue individual opinions.

Post-award proceedings

Article 53(1) of the ICSID Convention provides that ICSID awards are not subject to any remedies other than those specified in the Convention itself. Recourse against ICSID awards is thus limited to four types of post-award proceedings under the Convention, namely:

  • correction and supplementation;
  • interpretation;
  • revision; and
  • annulment.

Correction and supplementation

Awards can be corrected or supplemented at the request of a party in accordance with article 49(2) of the ICSID Convention within 45 days from the day the award is rendered. This procedure is limited to two narrowly defined types of situations, namely:

  • a tribunal’s inadvertent failure to decide an issue that it had been requested to decide; and
  • the rectification of clerical or arithmetical errors.

Interpretation

A party can request the interpretation of an award in accordance with article 50(1) of the ICSID Convention if there is a dispute as to the ‘meaning or scope’ of the award between the parties. The secretary-general of ICSID will submit the request to the original tribunal if possible – otherwise a new tribunal needs to be constituted.

Revision

A party may request the revision of an ICSID award in accordance with article 51(1) of the ICSID Convention in case of ‘discovery of some fact of such a nature as decisively to affect the award’. The fact must have been unknown to both the applicant and the tribunal, the applicant’s ignorance must not have been negligent and the circumstances must be such that the tribunal’s knowledge of the fact would have led to a different decision. A request must be made within 90 days of discovery of the fact and, in any event, within three years of the date of the award. Here again, the secretary-general of ICSID will submit the application to the original tribunal, if possible.

Annulment

By far the most relevant post-award procedure in practice is the one under article 52 of the ICSID Convention relating to the annulment of ICSID awards. The grounds for annulment are conclusively listed in article 52(1) as follows:

  • the tribunal was not properly constituted;
  • the tribunal manifestly exceeded its powers;
  • there was corruption on the part of a member of the tribunal;
  • there has been a serious departure from a fundamental rule of procedure; or
  • the tribunal failed to state the reasons on which it based its decision in the award.

A request for annulment must generally be submitted within 120 days of the date of the award, except where it is based on allegations of corruption, in which case it must be made within 120 days of the discovery of the corruption and, in any event, within three years of the date of the award. An annulment request is decided by a three-member ad hoc committee appointed by the president of the World Bank from ICSID’s panel of arbitrators. The committee members must not be nationals or have been designated by either the state party to the proceedings or the investor’s home state.

While review of an award is limited to the five grounds for annulment listed in article 52(1) ICSID, ad hoc committees have sometimes interpreted their mandate rather liberally, taking a generous approach, in particular with regard to the grounds of ‘manifest excess of powers’, ‘serious departure from a fundamental rule of procedure’ and ‘failure to state reasons’. This may help to explain the popularity of the annulment process with unsuccessful parties: requests for annulment have been filed against approximately 40 per cent of all final awards rendered in ICSID proceedings so far.

If an ad hoc committee decides to annul all or part of the award, either party has the possibility to resubmit the dispute to a new tribunal. In case of only partial annulment of an award, the part that has not been annulled remains res judicata between the parties, and the competence of any new tribunal will be restricted accordingly.

Enforcement of ICSID awards

While recourse against ICSID awards takes place exclusively within the regime established by the ICSID Convention, the self-contained nature of the ICSID system does not fully extend to the enforcement of awards. On the one hand, article 54(1) of the ICSID Convention severely limits the grounds for refusing enforcement by providing that signatory states must enforce pecuniary obligations imposed by an award ‘as if it were a final judgment’ of one of their own courts. On the other hand, article 55 of the ICSID Convention specifies that signatories are not prevented from applying national laws with regard to the immunity of states from execution.

When it comes to state immunity regarding execution, most legal orders make a distinction between property designated for sovereign or official functions (for which immunity tends to be granted) and property intended for commercial use (for which immunity usually cannot be claimed). At the same time, the details regarding the application of national laws in this area vary considerably. In sum, therefore, while ICSID proceedings and recourse against ICSID awards follow a single system of rules that is completely detached from any national legal order, the same is not true with regard to the enforcement and execution of ICSID awards.

In practice, it appears that most ICSID awards are paid voluntarily by respondent states. ICSID’s association with the World Bank and the associated leverage with borrowing signatories as well as the rule contained in article 54(1) of the ICSID Convention are both likely to play a role in the effective implementation of ICSID awards. From an investor’s perspective, when it comes to the enforcement of arbitral awards, the ICSID system presents a clear advantage over other enforcement regimes, in particular that under the New York Convention.


Back to Arbitration




Follow Getting the Deal Through for the latest updates on law and regulation worldwide

Follow us on LinkedIn