Tag Archives: ICSID

Arbitrators’ Independence and Impartiality

ArbitratorsBlogThe parties in an ISDS case select the arbitrators that resolve their dispute. Arbitration law and institutional rules provide layers of control mechanisms to ensure the impartiality and independence of these arbitrators.

The SCC Arbitration Rules require that every arbitrator must be impartial and independent. This requirement extends from the outset and throughout the proceeding. Prior to appointment, an arbitrator must disclose any circumstances which may give rise to justifiable doubts as to his or her impartiality or independence. Further, a party to a dispute may challenge an arbitrator during the course of the proceedings, if new circumstances arise or facts come to light that lead the party to doubt the arbitrator’s independence or impartiality.

Most institutions, including the SCC, evaluate challenges to arbitrators under an objective standard – that is, the arbitrator is disqualified if the circumstances, from the point of view of a reasonable third person, give rise to a conflict of interest. In other words, it is not necessary to show that the challenged arbitrator in fact lacks independence and impartiality, but rather that there is an appearance of partiality.

In arbitrations administered by the SCC, the SCC Board makes the final decision on arbitrator challenges. In evaluating challenges, the Board may refer to the International Bar Association Guidelines on Conflict of Interest in International Arbitration (“IBA Guidelines”). The IBA Guidelines list specific situations in which an arbitrator should decline an appointment, or step down if already appointed.

For example, the SCC Board sustained a respondent’s challenge to an arbitrator appointed by claimant because the arbitrator’s firm had been involved in matters both for and against the respondent. The arbitrator was released from the appointment. Read this article for more information on challenges in SCC cases.

The ICSID Convention, developed by States, provides that an arbitrator can be dismissed if he or she manifests a lack of the qualities required to sit as an arbitrator. A proposal to disqualify an arbitrator was upheld in Bluebank v. Venezuela, on the ground that the arbitrator appointed by claimant worked in a law firm that represented other claimants in unrelated ICSID cases against Venezuela.

Under the ICSID Convention, an ISDS award may be annulled if the tribunal was not properly constituted. This may include situations where an arbitrator failed to disclose potential conflicts of interest before or during the arbitration.

ISDS and the Rule of Law

Wooden judge's gavel and calculator over some financial documentsISDS is governed by international rules, established by states. The governing rules can either be the Convention on Settlement of International Investment Disputes (the ICSID Convention) or other sets of arbitration rules, to name one is the UNCITRAL Arbitration Rules. These rules ensure the proper and fair functioning of the mechanism. Let’s take a look at these rules.

The ICSID Convention has been signed by 159 states and it has governed most ISDS cases. It provides, among others, that an arbitrator in an ISDS case can be disqualified if he or she shows lack of the qualities required to sit as an arbitrator. Awards rendered under this convention may be annulled, among others if arbitrators manifestly exceeded their authority.

The UNCITRAL Arbitration Rules is a result of the work of the United Nations Commissions on International Trade Law (UNCITRAL) which commenced in 1973. The General Assembly of the United Nations adopted the first version of UNCITRAL Arbitration Rules in 1976. The rules provide, among other things, that arbitrators can be challenged if there is any doubt about their impartiality and independence.

On the enforcement front, ISDS is safeguarded by the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards. The Convention demands that all state parties enforce decision rendered in the other state parties. This means that ISDS decision is enforceable in 154 states, who are parties to this Convention.

Finally, domestic law is also one of the pillars which safeguards the functioning of ISDS. Domestic law may provide grounds for a domestic court to refuse enforcement of ISDS award, for example if a party to the dispute was unable to present its case in an arbitration proceeding.

ISDS supports and governed by rule of law. It is not a “private justice system” outside the legal system, as is sometimes incorrectly referred to. As explained above, states have always had strong involvement in establishing the rules governing the mechanism.

Arbitrators’ expertise makes ISDS strong

???????As investment and trade develop, disputes will be more diverse. Looking back at history, the International Center for Settlement of Investment Disputes (ICSID) only registered 28 ISDS cases during the first two decades after its establishment. In contrast, there have been 38 cases registered at the ICSID in the year 2014 alone. The substantive issues of disputes have become more diverse, and therefore a wider range of expertise is needed to solve the disputes.

One cannot perceive how future disputes will look like and what expertise will be required. At the same time, the quality of ISDS outcome needs to be ensured. The current practice has served this purpose by allowing parties to the dispute and/or arbitration institutes to appoint arbitrators from a broad range of expertise, as opposed to a pre-determined list.

Let’s look at some of the cases. In Glamis Gold v. USA, the tribunal had to decide whether a requirement to conduct a certain mining technique had constituted an indirect expropriation. This case required expertise to assess the value of the mining project, including evaluation of mineral price. In fact, the tribunal contributed 100-page analysis only on this issue.

In another case, Methanex v. USA, the tribunal was faced with lengthy submissions from parties on whether or not a certain chemical for fuel production was dangerous for the environment. In addition, there have been other complicated disputes on, among other things, electricity pricing and gas pricing. The above cases are only small part in the big pool of ISDS cases which requires specific expertise.

The current system of arbitrator’s appointment has made international arbitration able to adapt with the present needs of dispute resolution. Most importantly, it can keep up with the trade development. It is therefore unwise to replace this important feature with a pre-determined list of arbitrators.

Why ICSID was established

national flags of the different states against the blue skyIt is challenging to reach an agreement on a global level on key issues, as shown in the global efforts to regulate greenhouse gas emissions. The investment law regime has long had the same problem. Many attempts to agree on a global standard for the protection of foreign investments have failed because of the countries’ different ideas about which rights to be provided for foreign investors.

It was this failure that motivated the World Bank to establish ICSID (International Centre for Settlement of Investment Disputes). Instead of regulating the level of protection that foreign investors can rely on – and therefore had proved to be very difficult – the solution was to establish a purely procedural framework for settling disputes by way of the ICSID Convention, which was signed in 1965. The Convention does not provide substantive investment protection. This matter has instead been left to countries to agree among themselves, often at a bilateral level.

By focusing on the procedural aspects rather than on substantial, ICSID has gained great support from countries. In addition, a big problem in the mid-twentieth century could be fixed: State’s intervention in economic matters. Previously, disputes between governments and foreign investors could only be solved by government intervention. In a world where major former colonial powers often faced the newly independent countries, the country with the power often won. In addition, some part of world trade took place with countries with a negative view on market economy, such as those who belonged to Soviet’s sphere of interest. By the establishment of ICSID, the playing field could be evened out and independent dispute resolution was first introduced in world trade. Instead of political power, rule of law would decide the disputes.

In hindsight, this has proven to be a recipe for success for ICSID. The Convention has now been signed by 159 countries and the centre in Washington has administered hundreds of disputes. Furthermore, while global attempts to regulate investment protection have failed, ICSID remains strong. The reason was largely because the majority of the thousands of bilateral investment treaties (BITs) refers to the center to solve disputes. Even in modern times new investment agreement continuously refer to ICSID for the settlement of investment disputes.

Today, there have been ideas to create a global system for settling investment disputes. It may be worthwhile to remember that there is already such a system, which for decades has been accepted by the overwhelming majority of the countries, and that this system was established with the aim of creating a neutral playing field for dispute resolution that otherwise tend to be politicized.

NGO voices in ISDS

Conference table, microphones and office chairs close-up

Beginning in 2001, a number of different NGOs have been active in ISDS proceedings, most commonly in cases with public interest aspects. This includes cases referring to measures related to for example environmental protection and public health.

NGOs may apply to be “a friend of the court”, or commonly referred to as amicus curiae. This means that the organisation contributes with a written submission to assist the tribunal in the assessment of the claims.

Participation of NGOs was initially found only in ISDS cases brought under the North American Free Trade Agreement (NAFTA). The NAFTA parties have issued a joint statement which essentially says that the NAFTA does not prohibit submission of a non-party, in this case may include NGOs.

Methanex Corp v USA was the first case where the tribunal opened up for NGOs to make written submission, which included environmental organizations and research institutes. In addition, these NGOs also attended the hearing. It was followed by Glamis Gold v. USA, where the tribunal received written submission by, among others, a locally-based Quechan Indian Tribe, whose sacred sites and traditions were affected by the investor’s mining project.

Since then the ICSID Arbitration Rules have been amended to clarify that tribunals have the general authority to allow submissions by an organisation which is not a party in the dispute.

NGOs have participated not only in NAFTA cases. In Biwater Gauff v. Tanzania, the tribunal accepted written submission from NGOs with an expertise in human rights, environmental and good governance issues.

A recent development is the participation of international organization in ISDS proceeding, as shown in Phillip Morris v. Uruguay. In this case, not yet decided, the opinions of the World Health Organization (WHO) and the WHO Framework Convention on Tobacco Control Secretariat will also be heard, based on the ICSID Arbitration Rules.

In a recent development, the UNCITRAL Transparency Rules, in force as of 1 April 2014, provide that tribunal may allow submission from non-disputing parties for matters within the dispute. Read our previous post on this.

 

 

ICSID Numbers with a Focus on the European Union

The International Center for Settlement of Investment Dispute (ICSID) has released its caseload statistics with a special focus on the European Union. The ICSID is an organization within the World Bank Group, and administers the majority of ISDS cases.

As of March 1, 2014, the ICSID had registered 463 cases under the ICSID Convention and Additional Facility Rules.

The statistics show as follows:

  • Among 463 cases administered by the ICSID, 55 cases or 12% of the cases, involved a member State of the European Union as respondents.
  • Of these 55 cases, 71% were commenced by an investor who was also from an EU member State. In short, the majority are intra-EU cases.
  • Almost a third (27%) of these cases were instituted by individual persons.
  • Sweden, the United Kingdom, Austria, Denmark, Ireland, Luxembourg, Malta, the Netherlands and Portugal are member States that have not been a respondent State in ICSID cases.
  • The EU member States that have appeared most frequent as respondent in ISDS proceedings are Hungary (11 cases) and Romania (9 cases).
  • Investors from an EU member State were involved in 54% of the total of registered ICSID cases. This makes EU investors the most frequent users of ISDS.

The ICSID Caseload – Statistics 2014

The ICSID recently published its latest caseload statistics of ISDS cases since 1972 until 30 June 2014. According to an UNCTAD report, ICSID has administered the majority of ISDS cases, which accounts for 62% of all ISDS cases as per 31 December 2013.

Below are some interesting points from the statistics:

  1. Since 1972 until 30 June 2014, ICSID has registered 464 investment arbitration cases and 9 conciliation cases.
  2. The basis of the ICSID jurisdiction is found not only in bilateral investment treaties or free trade agreements, but also in investment law of host states and investment contracts between investors and host states.
  3. Among all ICSID cases that have been decided by tribunals so far, tribunals have declined jurisdiction in 25% of cases, dismissed all claims in 28% of cases and decided that the claims are manifestly without legal merit in 1% of cases. This means that government prevailed in 54% of cases. In 46% of cases, tribunals have upheld investor’s claims in part or in full.
  4. South American, Eastern European and Central Asian countries remain the mostly-involved State party in ICSID cases, followed by the countries in Sub-Saharan Africa, Middle East and North Africa.

Looking at the latest trend, between 1 July 2013 and 30 June 2014, tribunals declined jurisdiction in 48% of cases and dismissed all claims in 24% of cases. This means that governments prevailed in 72% of cases. In 28% of the cases the investors’ claims have prevailed in part or in full.

A better debate on ISDS

Let us start with a better debate on ISDS. Describing ISDS as a method by which investors are “circumventing decisions states deem in their best interest” is simply not correct. Yet, this argument recently came up in an Op-Ed at the New York Times.

But a better debate should start with a comprehensive understanding of the basis and functioning of ISDS.

From the outset, the Op-Ed reflects a lack of understanding of the rule of law. Governments are not immune. We cannot go back to the days where “the King can do no wrong”. When a government violates a certain right, an individual who suffers damage from the violation should be able to bring a claim to enforce his/her right.

The right to bring a claim against the state in ISDS does not come from thin air. It comes from an investment treaty, concluded by the very same state. The treaty typically provides, for the substantive part, certain rights to foreign investor and, for the procedural part, the right to bring a claim against government to enforce this right.

In comparison, the human right regime similarly provides for the right of individuals to bring a claim against a government for an alleged violation of a human rights protection. In fact, the European Court of Human Rights received more than 65,000 claims in the year 2013 alone. As we have written before, a large number of ISDS claimants are also individuals.

Governments have also been using ISDS to bring claims against investors, provided the underlying agreement provides for this possibility. See for example an ICSID case, Republic of Peru v Caraveli.

A better debate on ISDS should carefully put numbers into perspective. The Op-Ed is critical towards the huge claims in the Vattenfall and Pacific Rim cases to illustrate the system’s flaws. These cases are not yet decided thus it is at best unwise to assess ISDS as a legal mechanism based on undecided claims.

The Op-Ed further points out the unusually high award in Occidental Petroleum v Ecuador. This fact however does not define ISDS as a legal mechanism. If the investor’s claim is granted, the amount of damages does not depend upon ISDS as a procedural form, but upon the size of the investment in the first place. A calculation of damages needs to be done also when domestic courts are charged with the task of deciding claims based on an alleged violation of rights.

The ICSID statistic is clear that in 43% of cases, government was successful in defending its case.

The Op-Ed is therefore nothing more than a selective mentioning of different ISDS claims. It does not analyze the functioning of the system or even the merits of the claims. The important debate on the future of ISDS and the importance of the rule of law deserves a more fact-based approach.