Investment Arbitration and Enforcement of Awards
Investment arbitration is not a new concept in the present day. The developed nations as well as the major developing countries are providing for this option in their treaties and contractual clauses to increase the confidence of the investors and to ensure protection of their investment in the host State. The present article
|delves into the various benefits of the ICSID Investment Arbitration under the ICSID Convention and the ICSID Additional Facility Rules. The article looks into the provisions of the ICSID Convention which offers a procedural alternative for investment arbitration. The provisions of the Bilateral Investment Treaty which nowadays provides the consent for investment arbitration and more specifically ICSID arbitration are also being looked into writes Abheek Saha.
The ICSID Convention is a multilateral treaty formulated by the World Bank to create an impartial international forum for the resolution of legal disputes between foreign investors and States through conciliation or arbitration procedures. The ICSID Convention created the International Centre for the Settlement of Investment Disputes (ICSID) to administer these disputes. ICSID Convention came into force in the year 1996 and till now 157 countries have ratified it.
Apart from the ICSID Convention, all other methods of arbitration, including ICSID Additional Facility rules, provide for the conduct of arbitration under the rules chosen by the parties, which are complemented by the rules of procedure of the legal system of the place of arbitration. This means that, depending on the place of arbitration and the applicable legal system, non-ICSID arbitrations are subject to different rules of procedure, the awards ensuing therefrom is subject to different means of recourse and the recognition and enforcement of such award is in principle governed by the New York Convention.
The common principle(s) of Investment protection are as follows -
i) No expropriation without compensation;
ii) Fair and equitable treatment;
iii) Full protection and security;
iv) No arbitrary or discriminatory measures impairing the investment;
v) Free transfer of funds related to investment;
vi) National and most favoured nation treatment.
The State party to the dispute is bound to respect the obligations undertaken by it under the ICSID Convention not only vis-a-vis the State of the investor’s nationality but also all other State parties to the Convention. The fact that the State of the investor’s nationality has to abstain from intervening during the currency of the arbitral proceedings stresses that the dispute be not influenced by political considerations. As observed by Prof Schreuer, "the arbitration procedure provided by ICSID offers considerable advantages to both sides. The foreign investor no longer depends on the uncertainties of diplomatic protection but obtains direct access to an international remedy. The dispute settlement process is depoliticized and subject to objective legal criteria. In turn, the host State by consenting to ICSID arbitration obtains the assurance that it will not be exposed to an international claim by the investor’s home State....."
However, once an award has been rendered settling the dispute, that same State may exercise diplomatic protection or bring an international claim for violation of the convention should the State party to the dispute fail to comply with the award.
Before creation of the ICSID, disputes between foreign investors and the governments of countries which hosted them were resolved between the countries themselves. This means that the home country of the foreign investor would espouse its cause and attempt to resolve the dispute with the host country through diplomatic channels. With the creation of the International Court of Justice (ICJ) disputes could be brought before that forum if both governments consented to the same. However, this inter-state paradigm for dispute-resolution was unsuited to the needs of expanding cross-border business in the postcolonial setting. The ICSID Convention created an arbitral institution that gives private parties (foreign investors) direct access to justice wherein they can seek redressal against the actions of host governments and thus address the need of the present time.
Advantages of ICSID Convention method-
The benefits of ICSID method have been summarised as follows-
i) It provides investors with direct access to a form of settlement of dispute they may have with a host State;
ii) It extends the possibility of dispute settlement beyond the realm of national courts in the host State;
iii) Investors do not have to depend upon the willingness of their home State to exercise diplomatic protection on their behalf;
iv) The enforcement provisions of the ICSID Convention make it highly probable that the final ICSID award will be effectively enforceable.
A major advantage of the ICSID system is that it does not allow parties to seek annulment of an award before a national court. Under the Convention, an ICSID award is to be recognized by contracting states as if it were a final judgment of a court of that state. The only remedies available are those provided under the Convention and are restricted to a request for interpretation, a request for revision based on a newly-discovered decisive fact and a request for annulment. The five grounds for annulment are narrower than the grounds for refusing recognition or enforcement of an award under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"). On the basis of their rights under the New York Convention, states have usually adopted legislation under which recognition or enforcement of a foreign arbitral award can be prevented on the grounds that the award is contrary to the state's own public policy. This is not a ground for non-enforcement under the ICSID Convention.
ICSID arbitration offers advantages to the investor as well as to the host State. Proceedings may be instituted by either side but in the majority of cases the investor is in the position of claimant. The Report of the Executive Directors on the Convention describes this balance of interests in the following terms:
While the broad objective of the Convention is to encourage a larger flow of private international investment, the provisions of the Convention maintain a careful balance between the interests of investors and those of host States. Moreover, the Convention permits the institution of proceedings by host States as well as by investors…
ICSID Convention is specialized in the settlement of investment disputes. Therefore the existence of a legal dispute arising out of an investment is a prerequisite for ICSID’s jurisdiction. The concept of investment is not defined in the Convention but many BITs and multilateral treaties contain definitions of investment.
Section 25 of the ICSID Convention states that- (1) The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally…".
Therefore, three requirements have to be satisfied in order for ICSID to have suitable jurisdiction. These requirements are consent of the parties, personal jurisdiction, and subject matter jurisdiction.
(b) Personal Jurisdiction;
(c) Subject matter jurisdiction.
The jurisdiction of ICSID is restricted to cases where both parties have consented to submit their dispute to the Centre. This makes ICSID a voluntary arbitral institution. The most important requirement for consent to ICSID arbitration is for the consent to be in writing. Consent in ICSID may represent either a clause compromissoire with respect to future disputes or a compromise regarding an existing dispute. Thus, while consent is required before a request for arbitration can be registered by the Centre, consent can be given before or after the dispute in question arises. The consent to ICSID jurisdiction can be found in the provisions of national legislation, Bilateral Investment Treaties.
The personal jurisdiction of ICSID restricts the parties eligible for dispute resolution to a Contracting State and a foreign investor. As well as consenting to ICSID arbitration, both parties must qualify as proper persons. Article 25(1) requires that the dispute be 'between a Contracting State and a national of another Contracting State...' This however is not as straightforward as it seems. The home and host states of the investor must each be a Contracting State, which is a state that had, at least thirty days earlier, deposited an instrument of ratification, acceptance or approval with the World Bank.
An ICSID arbitrator or tribunal does not have jurisdiction over political, economic or purely commercial disputes. The ICSID arbitrator or tribunal can only arbitrate 'a legal dispute arising directly out of an investment.' A definition of the terms 'legal dispute' and 'investment' were not included in the Convention but was left intentionally to be decided by the Tribunal. This gives the tribunal wide jurisdiction to bring within its ambit various disputes and to exclude many more which are not investments in real terms.
In case of proceedings before ICSID Tribunal the principle of non-frustration of proceeding applies. The principle of non-frustration means that a case will proceed even if one party fails to cooperate. This circumstance alone will be strong incentive to cooperate. ICSID Convention is not threatened by the non-cooperation of a party. If one of the parties should fail to act, the proceedings will not be stalled. The Convention provides a watertight system against the frustration of proceedings by recalcitrant parties. Eg. Arbitrators not appointed by the parties will be appointed by the Centre;16 the decision on whether there is jurisdiction in a particular case is with the Tribunal17; non-submission of memorials or non-appearance at hearings by a party will not stall the proceedings18; non-cooperation by a party will not affect the award’s binding force and enforceability.
Parties to ICSID arbitration proceedings must be a State, or sometimes a State entity, that has ratified the ICSID Convention and a national, whether a physical or legal person, of another Contracting State. Thus, companies from one Contracting State who invest in another Contracting State may have recourse to ICSID arbitration proceedings in the event of a dispute with the host State, provided that consent to submit such disputes to ICSID has been provided for in either a contract or in a bilateral investment treaty (BIT). An additional requirement is that the investor must not be a national of the host State. But if a foreign investor and the host State agree, the company will be treated as a foreign investor because of foreign control.19
In TSA Spectrum de Argentina S.A. v. Argentine Republic, a tribunal constituted pursuant to the Rules of the International Centre for the Settlement Investment of Disputes ("ICSID") dismissed on jurisdictional grounds the claim by TSA, a wholly-owned subsidiary of a Dutch company, that Argentina breached its obligations under the Bilateral Investment Treaty between the Netherlands and Argentina (the "BIT") when it terminated a concession contract between TSA and a government agency. While the Tribunal rejected Argentina’s request for dismissal based on a forum selection clause in the concession contract, the Tribunal found that it did not have jurisdiction under Article 25(1) of the ICSID Convention because, despite the fact that the claimant was a Dutch national, TSA was ultimately controlled by an Argentine citizen.
The second issue considered by the Tribunal in the above case was more controversial. Article 25(1) of the ICSID Convention provides that ICSID has jurisdiction over disputes between a Contracting State and a national of another Contracting State. In the case of corporations ("juridical persons"), the first clause of Article 25(2)(b) defines a national of another Contracting State as a juridical person with the nationality of the State other than the State party to the dispute. In such circumstances, tribunals have generally upheld jurisdiction even where the corporation of the other state is owned or controlled by nationals of the state party to the dispute. Thus, in Tokios Tokelés v. Ukraine and Rompetrol Group N.V. v. Romania, the Tribunal held that a Lithuanian corporation was a Lithuanian national even though it was controlled by Ukrainian citizens. Refusing to "pierce the corporate veil," the Tribunal found that it had jurisdiction to consider the corporation’s claim against Ukraine under the first clause of Article 25(2)(b).
TSA presented a different problem, because it was incorporated in Argentina, not the Netherlands. Therefore, the Tribunal had to determine jurisdiction based on the second clause of Article 25(2)(b), which states that the term "nationals of another Contracting State" also includes corporations incorporated in the State party to the dispute (here Argentina) in the following circumstances:
any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of the Convention.
This clause was applicable because TSA had the nationality of Argentina (the Contracting Party to the dispute). Thus the issue for the Tribunal was whether TSA should nevertheless be treated as a national of the Netherlands "because of foreign control."
In TSA, the Tribunal found that the ultimate owner (i.e. controller) of TSA, Mr. Jorge Justo Neuss, was an Argentine citizen. Mr. Neuss, the claimant, also controlled the Dutch company holding the TSA shares. Accordingly, the Tribunal dismissed the action because "TSA cannot be treated, for the purposes of Article 25(2)(b) of the ICSID Convention, as a national of the Netherlands because of absence of ‘foreign control.’"
Jurisdiction is determined in the ICSID system by the Secretary-General, even though only in a limited manner. This is performed upon the submission to him of an arbitration request. If the request is registered by the Secretary-General and a tribunal is constituted, the tribunal may consider jurisdiction at any time. Under Article 36(3) the Secretary-General shall not register a request for arbitration if he discovers through the information contained in the request that 'the dispute is manifestly outside the jurisdiction of the Centre.'
Bilateral Investment Treaty & MITs
Today, the majority of ICSID disputes arise out of BITs (Bilateral Investment Treaties).20 BITs are treaties entered into between States with the aim of protecting and encouraging investments between those States. They grant substantive protections to foreign investors which are designed to prevent unlawful governmental interference with investments. Most BITs also contain an offer by the State to resolve any disputes arising under the BIT through international arbitration at ICSID. This gives investors the ability to enforce the BIT directly against the host State by means of international arbitration.
The multilateral investment treaties (MITs) like the NAFTA (North American Free Trade Agreement), Energy Charter Treaty are also provide consent for investment arbitration.
The use of investment protection agreements had kicked off in the last decade and there are now approximately 2500 such agreements worldwide, with nearly one hundred and seventy countries participating. Emerging market countries in Latin America, Asia and Africa are active participants in such agreements,21 as they see it as an inexpensive means to mitigate risk and also attract foreign investors.
Government of India have, so far, (as on July 2009) signed BIPAs with 75 countries out of which 66 BIPAs have already come into force and the remaining agreements are in the process of being enforced. In addition, agreements have also been finalised and/ or being negotiated with a number of other countries.22 Article 9 and 10 of the Indian Model Text of Bilateral Investment Promotion and Protection Agreement (BIPA) provides the dispute settlement clauses to be applied in case of dispute arising between the investors and the other contracting party.
Saipem vs. Bangladesh - In this case Saipem took recourse to the dispute settlement provision under the BIT between Bangladesh and Italy, after the undue intervention by the Bangladesh courts resulted in non-enforcement of ICC award in favour of Saipem. The basis of Saipem’s claims was the undue intervention of the Bangladeshi courts in the ICC (International Chamber of Commerce) arbitration, which precluded the enforcement of the arbitration award in Bangladesh or elsewhere. According to Saipem, those acts constituted an expropriation and deprived Saipem of any compensation. Thus Saipem in its request for arbitration sought inter alia a declaration that Bangladesh expropriated Saipem of its investments without compensation and that Bangladesh breached its obligations under the BIT.
NT & MFN (National Treatment and Most Favoured Nation Treatment)
Most favoured nation treatment- The effect of this type of clause is to increase the level of protection the investor is afforded in line with the best the host State provides to national of any other State. The idea behind extending MFN status is to prevent unreasonable discrimination between imports from different foreign nations. With these objectives in mind, the multilateral negotiations are meant to discourage member states from engaging in unnecessary ‘protectionism’.23
National treatment- ‘National Treatment’ entails that no country will unfairly discriminate between domestically produced goods and services and those that are created in foreign countries.
Most of the bilateral and multilateral treaties provide for national treatment and most favoured nation treatment clause in the agreement. Though these concepts were not so popular in the early times, the recent agreements have extended these protections for the investors.
Eg.- By means of the MFN clause contained in the Sino-British BIT, a U.K. investor can benefit from the more comprehensive national treatment obligations contained in the 2003 Sino-German BIT.
Enforcement of awards
Awards are binding and final and not subject to review except under the narrow conditions provided by the convention itself.24 Non-compliance with an award by a State would be a breach of the Convention and would lead to a revival of the right to diplomatic protection by the investor’s state of nationality.25 Thus it provides for an effective system for enforcement.
Domestic courts have no power to review ICSID awards in the course of their enforcement. However, in the case of an award against a State the normal rules on immunity from execution will apply. In actual practice this will usually mean that execution is not possible against assets that serve the State’s public functions.26
All ICSID signatories of "Contracting States" are required to recognise and enforce ICSID arbitral awards (whether or not they are parties to the arbitration).
On 19 June 2009, the US District Court for the Southern District of New York issued an order to enforce an ICSID award in Siag v. Egypt, ICSID Case No. ARB/05/15 in which the tribunal awarded the claimants almost US$75 million, plus interest and expenses, totalling approximately US$133million. The award is the largest ever granted to individual claimants by the ICSID.
On 1st June 2009, in Siag v. Egypt, ICSID Case No. ARB/05/15, the International Centre for Settlement of Investment Disputes,27 awarded the claimants almost US $75 million, plus interest and expenses, totalling approximately US$133million. In the proceedings, the ICSID tribunal decided that Egypt had violated an investment treaty between Italy and Egypt that protected investments by Italians in Egypt, when the Egyptian government expropriated from the claimants a 161-acre resort property on the Gulf of Aqaba. In enforcement proceedings before the US District Court for the Southern District of New York, the court issued an order to enter judgment in the amount of the award adopting the procedure set out in Article 54 of the New York Civil Practice Law Rules, to effectuate entry of a judgment of an ICSID award. The award is the largest ever granted to individual claimants by the ICSID.
Annulment of the Award
An ICSID ad hoc Committee can only annul an award based on the following grounds. Article 52(3) of the ICSID Convention permits an ad hoc committee to annul an award only if at least one of the five grounds for annulment set out in Article 52(1) is met. These are: (a) the tribunal was not properly constituted; (b) it manifestly exceeded its powers; (c) an arbitrator was corrupt; (d) there was a serious departure from procedure; or (e) the tribunal failed to state reasons.
Whether India is a signatory to the ICSID Convention.
India did not sign or ratify the Convention till now.
ICSID Additional Facility
Though India is not a signatory to the ICSID Convention, still India can use the service of the ICSID Additional Facility which was created in the year 1978. It is designed primarily to offer methods for the settlement of investment disputes where only one of the relevant States, either the host State or the State of the investor’s nationality, is a party to the Convention. The Additional Facility may also be used for disputes which do not directly arise out of an investment, or for fact-finding proceedings.28 The Additional Facility is subject to its own rules and regulations. The ICSID Convention does not apply to it.
Currently claims by Indian investors against foreign states or claims by foreign investors against India can only be pursued through the ICSID Additional Facility Rules, the UNCITRAL rules or ad hoc arbitrations. In all cases, the award is subject to national laws on the recognition of foreign arbitral awards. Moreover, nothing prevents national courts from interfering with arbitral proceedings. For investors, the major advantage of the ICSID system is that it is self-contained. ICSID tribunals have the power to make interim measures and are exempt from the scrutiny or control of domestic courts in contracting states.29 This may well ensure more efficient proceedings. Predictability is also increased because of ICSID's quickly growing body of arbitral case law, both procedural and substantive.30
Now-a-days direct arbitration between the host State and the foreign investor is the preferred option for the settlement of investment disputes. If arbitration is not supported by a particular arbitration institution, it is referred to as Ad hoc arbitration. Ad hoc arbitration requires an arbitration agreement that regulates a number of issues. These include the selection of Arbitrators, the applicable law and a large number of procedural questions. A number of institutions like UNICITRAL, have developed standard rules that may be incorporated into the parties’ agreement. But Ad hoc arbitration is subject to the rules of the arbitration law of the country in which the tribunal has its seat.
Thus, a step forward is the ICSID Arbitration under the ICSID Convention which provides much more security to both investors as well as the host State. The investors are ensured that the arbitration award is not subject to review by the national court of the host State which are sometimes looked as not being impartial forum for such disputes. And the host State by consenting to ICSID Arbitration attracts more number of investors which is a growing need for a country like India.
The Tribunal in Amco v. Indonesia explained that ICSID arbitration is in the interest not only of investors but also of host States. It concluded "Thus, the Convention is aimed to protect, to the same extent and with the same vigour the investor and the host State, not forgetting that to protect investments is to protect the general interest of development and of developing countries."
Most investors prefer seeking recourse to a neutral dispute-resolution mechanism instead of the domestic courts of the host country. In this light, the ICSID has emerged as a prominent forum for investor-state arbitration and of late, most Bilateral Investment Treaties (BITs) designate this institution as the proper forum for resolving prospective investment disputes. Thus India should also look forward and step into it with confidence. However, the growing importance of the ICSID also has its critics. But even though a country may feel vulnerable to arbitration by consenting to this method but the benefits are always more than the demerits as a country by consenting to ICSID arbitration promotes the competitive environment for business. And India is no more only a capital importing country but in the last few years has grown as a capital exporting country as well and thus the benefits received by the foreign investors in India are always on a reciprocating basis. Thus to remain competitive and to keep the growth intact India should sign and ratify the ICSID convention.
|ABHEEK SAHA is a fifth year student at M. S. Ramaiah College of Law, Bangalore.