CHAPTER 5 ARBITRATION BEFORE THE INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES

• Jurisdiction: United States

International Energy and Minerals Arbitration
(Feb 2002)
CHAPTER 5
ARBITRATION BEFORE THE INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
Abby Cohen Smutny
White & Case LLP
Washington, DC

This paper discusses several aspects of arbitration before the International Centre for Settlement of Investment Disputes ("ICSID" or the "Centre"). 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. It is, therefore, useful to begin by briefly describing ICSID's origin and the role it was designed to perform as an introduction to some of the pragmatic topics of interest to potential users of the Centre.

I. THE ORIGIN AND ROLE OF ICSID

The Centre's historical origins lay in the late 1950s and early 1960s when there was a growing polarization between traditionally capital importing countries—seeking to exert greater political and economic sovereignty over natural resources—and traditionally capital exporting countries—seeking to promote an international legal regime for the protection of private foreign investment. While various efforts to achieve a multilateral agreement on the substantive treatment of foreign investment were pursued during that time, for example, the 1962 OECD Draft Convention on the Protection of Foreign Property, they failed to achieve the intended results, as (among other reasons) debates regarding the standard of compensation owing in the event of an expropriation in particular remained highly politicized.

It was nevertheless clear that one of the most serious impediments to the flow of cross-border investment, recognized as fundamental to greater global economic development, was investor fear that any investment would be exposed to political risks, such as outright expropriation without adequate compensation, governmental interference short of expropriation but that substantially deprives the investor of the control or the benefits of its investment, and non-observance by the host government of contractual undertakings on the basis of which the investment was made.

It was also clear that the World Bank could play a role in addressing these concerns. In fact, the World Bank was called upon to facilitate resolution of an increasing number of disputes between governments and foreign investors on an ad hoc basis through mediation and conciliation. With great foresight, however, Aron Broches, the then General Counsel of the World Bank, recognized that the Bank could better promote increased cross-border investment by establishing a permanent, impartial, effective and de-politicized means of settling such disputes. Thus he led the negotiation and drafting of the Convention on the

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Settlement of Disputes between States and Nationals of Other States (the "ICSID Convention").

The ICSID Convention entered into force in 1966 establishing the International Centre for Settlement of Investment Disputes ("ICSID" or "the Centre") as an autonomous international organization. The ICSID Convention provides for the settlement of disputes specifically between host States and foreign investors through arbitration or conciliation.l

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. 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. Indeed, 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.

ICSID now occupies a central role institutionally in the legal regime governing foreign investment and the increasing awareness of it by the international legal community reflects that fact. This is in no small measure due to the emergence of the web of international investment protections contained in bilateral and multilateral treaties that include as a principal feature access for the foreign investor to ICSID arbitration in the event of a dispute with the government. Notably, in its first 20 years of existence, the Centre registered a total of 20 cases; in the following 10 years, another 18 cases; and in the last five years alone, a further 41 cases, 37 of which are currently pending.

ICSID has always been particularly relevant to the energy, oil and gas and mineral sectors. Development of these sectors is critical to economic growth, and investments in these sectors are sizable, complex and risky undertakings that often involve contracting with governments or governmental bodies. Given the strategic importance of these industries, resulting disputes often are politically charged. ICSID exists for this very type of dispute, and disputes involving the energy, oil and gas and mineral sectors in fact have constituted the subject of a very large percentage of ICSID cases. ¹

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II. THE JURISDICTION OF THE CENTRE

Arbitration under the ICSID Convention is limited to a particular class of disputes - and due to the natural reluctance of Respondent States to accept jurisdiction in the face of an actual dispute, jurisdictional battles often constitute a significant phase of an ICSID arbitration. Notably, a significant number of cases have been dismissed for lack of jurisdiction and so parties are well advised to assess all cases carefully in that regard.

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. Each of these elements is discussed below.

A. Any Legal Dispute Arising Directly Out Of An Investment

"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. The drafting history of the Convention reflects that:

The expression "legal dispute" has been used to make clear that while conflicts of rights are within the jurisdiction of the Centre, mere conflicts of interests are not. The dispute must concern the existence or scope of a legal right or obligation, or the nature or extent of the reparation to be made for breach of a legal obligation.²

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. For ICSID's utility as an institution that will stand the test of time, the term necessarily had to be seen as embodying a flexible concept capable of meeting the needs of a changing global economy. ICSID's subject matter jurisdiction, nevertheless, 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. Although one may note that ICSID tribunals have tended to give significant weight to an agreement by the parties that a given dispute arises directly out an investment, the requirement that there be an investment is one that cannot be waived by the parties and as such cannot be disregarded.

B. A Contracting State Party

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). Although there are over 130 States parties, there

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are a notable number of States that to date remain ineligible (together with their nationals) to submit disputes to arbitration under the ICSID Convention, including, e.g., Brazil, Canada, Mexico, India, Iran, Iraq, Russia and Thailand. ³

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. That requirement, contained in the Convention, of a double-layer of...